aggregate amount of these fees and other sales loads that a fund may
pay to its distributor, to a percentage of the amount of gross new
sales of fund shares. Because most funds continually sell new shares
(and thus have new sales), we understand that most funds do not reach
this limit. As a result, broker-dealers generally may receive asset-
based sales charges on an investment in fund shares for as long as the
investor holds the shares (or, in the case of B shares, until the
shares convert). The conversion requirements of our ongoing sales
charge proposal would limit the amount of asset-based distribution fees
that an individual investor would pay to an amount that is tied to the
front-end load of the fund, or the NASD sales charge limits.
    Our proposed amendments to rule 6c-10 may have the effect of
reducing the total compensation that intermediaries receive from the
sale of certain types of shares (such as B, C, or R shares). However,
as discussed previously, any reduction in compensation would be

experienced as reduced costs for investors because distribution charges
that are not deducted from fund assets would be retained by
shareholders.
    The amount of any reduction in intermediary compensation that might
result is speculative.\503\ For example, many class B shares currently
convert on a schedule that generally meets, or come close to meeting,
the requirements we propose today. Therefore, we anticipate that
complying with the proposal's requirements with respect to class B
shares would result in, at most, a minor reduction in compensation to
broker-dealers. Class C shares (which are generally described in fund
prospectuses as being suitable for short-term investments) do not
convert, but if they are sold as short-term investments, we believe
they generally would not be held long-term. Based on average holding
periods for funds generally, we expect that only a limited portion of
outstanding class C shares would be held long enough for any asset-
based distribution fees on class C shares to exceed the proposed
ongoing sales charge limit.\504\
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    \503\ The staff has estimated some potential effects of our
rulemaking on investor behavior (and consequent reduction in
intermediary compensation) in Section V.E of this Release, supra.
    \504\ Comprehensive data on the typical retention period for C
shares is not available, but the typical fund shareholder only holds
fund shares for approximately 3-4 years. Based on a front-end load
equal to 6%, a C share investor could pay an ongoing sales charge of
75 basis points for approximately 8 years before reaching the
ongoing sales charge limits we propose today. This holding period
would be more than double the typical holding period for all fund
shares, and particularly long for C shares, which funds disclose as
appropriate for short-term holding periods.
---------------------------------------------------------------------------

    Funds with class R shares or similar classes (which typically are
sold in tax-advantaged accounts and are intended as long-term
investments) may charge 12b-1 fees in amounts exceeding 25 basis points
that would become subject to the limitations on ongoing sales charges.
These share classes often use 12b-1 fees to pay for associated
recordkeeping and shareholder services, as well as for distribution
expenses. As we have discussed above, some funds may be in a position
to identify those non-distribution expenses and re-characterize them as
administrative fees, thereby avoiding the need to impose an ongoing
sales charge without reducing distribution payments to intermediaries.
To the extent that any portion of 12b-1 fees currently charged on class
R shares must be considered to be an ongoing sales charge, any estimate
reduction in compensation resulting from our proposal would be
speculative, because as discussed above, we anticipate that the lost
revenue may be recovered through other sources.\505\
---------------------------------------------------------------------------

    \505\ As discussed above, broker-dealers often receive payments
from fund advisers known as ``revenue sharing,'' which supplements
the compensation they receive for distributing fund shares. See
supra note 65.
---------------------------------------------------------------------------

    If intermediaries experience a significant reduction in
distribution compensation, would they be likely to renegotiate revenue
sharing agreements and recover some or all of the lost compensation
through these sources? Would intermediaries be likely to receive less
compensation based on the ongoing sales charge limits of our proposal?
How much less? Would they make up any or all of any such loss through
revenue sharing agreements? Do commenters believe that this reduction
in compensation should be treated as a cost of the proposal,
considering that any reduction would come with a corresponding increase
in the assets held by investors?
    Intermediaries such as broker-dealers, banks, and insurance
companies may also incur costs in connection with our proposals.\506\
For example, these intermediaries may need to enter into new or amended
distribution agreements with the funds that they sell, enhance their
recordkeeping systems, update sales literature, and provide additional
training to their sales representatives regarding the new regulatory
framework for mutual fund asset-based distribution fees and the
suitability of different share classes for their clients. The staff
estimates that there are approximately 4,770 of these types of
intermediaries, and that approximately 40% of these intermediaries (or
1,908) receive 12b-1 fees, and therefore would be affected by our
proposal.\507\ The staff estimates that, on average, each affected
intermediary would expend $50,000 in costs and 100 hours of internal
personnel time in response to our proposals.\508\ This internal time
would include approximately 75 hours spent by professionals such as
compliance personnel at a rate of $210 \509\ per hour and 25 hours
spent by inside counsel at a rate of $316 per hour, at a total internal
time cost equivalent of $23,650.\510\ Therefore, the staff estimates
that all intermediaries may incur approximately $95,400,000 in one-time
costs and 190,800 hours (at an internal time cost equivalent of
$45,124,200 as a result of the proposed new rule and rule
amendments).\511\
---------------------------------------------------------------------------

    \506\ The costs for retirement plan record keepers are discussed
below, and the costs for transfer agents are included in the
previously discussed costs for mutual funds above.
    \507\ This number consists of the following: 2,203 broker-
dealers classified as specialists in fund shares, 167 insurance
companies sponsoring registered separate accounts organized as unit
investment trusts, approximately 2,400 banks that sell funds or
variable annuities (the number of banks is likely over inclusive
because it may include a number of banks that do not sell registered
variable annuities or funds, or banks that do their business through
a registered broker-dealer on the same premises). This number may be
over or under inclusive, because the actual number of intermediaries
that would be affected would vary based on the intermediary's
business model and whether the intermediary sells funds that deduct
12b-1 fees.
    \508\ We recognize that this average will likely vary
significantly, with large intermediaries incurring many times this
cost estimate and small intermediaries likely incurring far less.
    \509\ The staff has based the hourly cost estimates for time
spent by intermediaries in this section on SIFMA's Management &
Professional Earnings in the Securities Industry 2009, supra note
407, because the staff believes the hourly costs are comparable.
    \510\ These figures are based on the following calculations:
($210 x 75 hours = $15,750); ($316 x 25 hours = $7,900); ($15,750 +
$7,900 = $23,650).
    \511\ These estimates are based on the following calculations:
(1,908 intermediaries x $50,000 = $95,400,000 in costs); (1,908
intermediaries x 100 hours = 190,800 hours expended); (1,908
intermediaries x $23,650 = $45,124,200).
---------------------------------------------------------------------------

    In addition, our proposal may require intermediaries such as
retirement plan administrators or other omnibus account record-keepers
to begin tracking share lots and managing share conversions. This
change may require these intermediaries to invest in new systems or
enhance their current recordkeeping and back office systems. If a
retirement plan offers fund classes that deduct an ongoing sales
charge, the proposal would require such shares purchased by plan
participants to eventually be converted to a class that does not deduct
an ongoing sales charge. This conversion requirement would create costs
for retirement plan record-keepers because we understand that
currently, most record-keepers do not maintain individual participant
share histories. Record-keepers for plans that offer shares classes
with an ongoing sales charge would need to begin tracking the date of
purchase of each share lot for each participant, and tie that share
history to the appropriate conversion date. In addition, plans
currently usually only have a single class of shares for each fund
offered within the plan. If our proposal is adopted, however, if the
single class that is offered within the plan deducts an ongoing sales
charge, a second class of shares for each fund (i.e. a target class for
converted shares) would have to be added to the record-keeper's
systems, effectively adding more complexity and costs to their
operations. For example, as a result of this increase in the number of
shares classes, record-keepers might

need to increase the size of their participant statements, spend more
time answering participant questions, process more trades, and manage
operational complexities related to multiple share classes (such as
allocating withdrawals between share classes for participant loans and
rebalancings, identifying the correct conversion date for reinvested
dividends, and other issues).
    Only record-keepers that provide services to retirement plans that
offer fund share classes with 12b-1 fees in excess of 25 basis points
would be affected by our proposal.\512\ The staff estimates that there
are approximately 2,025 intermediaries that provide recordkeeping for
retirement plans, and that approximately 25% (or 506) of those record-
keepers provide services to plans that offer fund share classes with
12b-1 fees in excess of 25 basis points.\513\ The staff estimates that
approximately 35% (or 177) of the 506 affected record-keepers would
choose to upgrade their systems to manage ongoing sales charges, while
the other 65% (or 329) would choose to do business only with plans that
offer funds without an ongoing sales charge, and thus avoid the costs
discussed below.\514\ The staff estimates that it would cost a record-
keeper approximately $1,000,000 in one-time costs and $1,500,000
annually to manage ongoing sales charges for the plans they
service.\515\ These expenses would include, but not be limited to,
expenses related to enhancing computer software to begin tracking and
aging share histories and multiple share classes, additional computer
hardware and storage costs for the increased volume of information
related to participant positions, larger participant statements (and
higher mailing costs), increased time spent providing service to
participants, and costs related to managing the operational
complexities discussed above. Therefore, the staff estimates that
intermediaries that provide recordkeeping services to retirement plans
may incur a total one-time cost of $177,000,000 and an annual cost of
$265,500,000 in complying with our proposal.\516\
---------------------------------------------------------------------------

    \512\ Record-keepers for plans that only offer funds with 12b-1
fees of 25 basis points or less would be generally unaffected by our
proposal, because they would not need to change their systems to
manage the ongoing sales charge and its related multiple share
classes and conversions.
    \513\ This includes 225 bank, mutual fund, and insurance record-
keepers, and an additional 1,800 third party administrators that
provide some recordkeeping for the plans they administer. The number
of participant accounts serviced by these record-keepers varies
widely, with some servicing more than ten million accounts, and
others only providing service to a few hundred or thousand accounts.
The costs we provide here are estimates for the average record-
keeper, and we acknowledge that the larger firms will likely incur
significantly higher costs, while the smaller firms may incur far
less.
    \514\ These funds might include funds that have re-assessed the
asset-based distribution fees they charge and restructured their
fees to identify non-distribution services that could be paid
separately from the asset-based distribution fee limits of our
proposal, in the manner discussed in Section V.D.2.b of this
Release, supra.
    \515\ The staff assumes that record-keepers would continue to
receive approximately the same amount of compensation for the
services they provide. Record-keepers currently often receive some
or all of their compensation from 12b-1 fees deducted from
participant funds. The staff expects that much of the compensation
that is currently paid to record-keepers through a 12b-1 fee in
excess of the marketing and service fee (which would be an ongoing
sales charge that would eventually end and no longer be able to pay
for recordkeeping services) may be re-assessed and paid as an
ordinary fund expense, and not be subject to the limits on asset-
based distribution fees contained within our proposal.
    \516\ These estimates are based on the following calculations:
(177 record-keepers x $1,000,000 one-time costs = $177,000,000 in
one-time costs); (177 record-keepers x $1,500,000 in annual costs =
$265,500,000 in annual costs).
---------------------------------------------------------------------------

    As discussed previously, under our proposed rulemaking, ongoing
sales charges would qualify as transaction based compensation, and
intermediaries who receive the ongoing sales charge may need to
register as broker-dealers under section 15 of the Exchange Act unless
they can avail themselves of an exception or exemption from
registration.\517\ The proposed rulemaking could potentially lead to
some intermediaries who are currently receiving 12b-1 fees but that are
not registered as broker-dealers under section 15 of the Exchange Act
to either no longer receive asset-based distribution fees or to
register as broker-dealers. However, we understand that virtually all
advisers and other intermediaries that currently receive 12b-1 fees in
excess of 25 basis points (thus qualifying as an ongoing sales charge)
already associate themselves with registered broker-dealers, either by
registering themselves, or by becoming an independent contractor
registered representative of a registered broker-dealer. Therefore, we
do not anticipate that, if our proposal is adopted, any intermediaries
who are currently receiving 12b-1 fees would newly register as broker-
dealers, and thus incur the costs associated with registration.
---------------------------------------------------------------------------

    \517\ See supra note 168.
---------------------------------------------------------------------------

    We request comment on all of the estimates and assumptions made in
this section.
     Is our understanding correct? Would the proposed
rulemaking in fact require any intermediaries who are currently
receiving 12b-1 fees to register as a broker-dealer? In particular, we
request comment on what types of intermediaries, if any would be
affected, and if they are affected, how many would be required to
register or no longer receive ongoing sales charges. If intermediaries
are required to register, what kind of costs would they incur? We
currently estimate that any new entities registering as broker-dealers
would incur a time burden of 2.75 hours to complete Form BD.\518\ Are
there other costs that would be implicated by broker-dealer
registration? Would other burdens be incurred and, if so, what are
those burdens? What one-time and on-going costs, if any, would be
incurred? We request comment on the estimates and assumptions we have
made in this section.
---------------------------------------------------------------------------

    \518\ Form BD is the application form used by entities to apply
to the Commission for registration as a broker-dealer. See Proposed
Collection; Comment Request (Apr. 20, 2010) [75 FR 22638 (Apr. 29,
2010)] (providing estimates of and seeking comments on compliance
burden of Form BD).
---------------------------------------------------------------------------

G. Disclosure

    The proposal would make the following changes to the disclosure
requirements:
     Amend Form N-1A to replace the current line item for 12b-1
fees in the fee table and statement of operations with two new line
items (``Marketing and Service Fee'' and ``Ongoing Sales Charge'') and
revise most of the current disclosure in the prospectus and SAI related
to the discussion of 12b-1 plans (which would no longer exist) and the
dollar amounts spent under the plans for different distribution
activities;
     Eliminate the periodic reporting requirement related to
12b-1 plans in Form N-SAR, the annual and semi-annual reporting form
used by mutual funds;
     Amend the statement of operations for fund income and
expenses in Regulation S-X to conform to our proposal;
     Amend Forms N-3, N-4, and N-6 to conform to our proposed
changes; and
     Provide better proxy disclosures for shareholder votes on
asset-based distribution fees.
    These proposed disclosure changes would provide a number of
benefits, including providing more descriptive disclosure of the use
and amount of asset-based distribution fees deducted by funds in
prospectuses and SAIs, providing greater transparency of these fees to
investors, removing requirements that would become outdated, and
conforming disclosure requirements to our proposal. We have discussed
these

benefits in detail previously in this Release in Sections III.I and
III.M above. These benefits include providing clearer disclosure of the
amount and use of asset-based distribution fees, eliminating
potentially confusing or unnecessary disclosure, and providing better
descriptions of the fees. The amendments would provide investors access
to more relevant and transparent information that could help guide
their investment making decision when considering whether to invest in
a fund that deducts asset-based distribution fees. As discussed below,
the staff estimates that there would be no additional ongoing costs as
a result of these disclosure changes, and in fact, those ongoing costs
may decrease.
1. Revised Fee Table, Prospectus, and SAI Disclosure
    The proposal would require funds to eliminate the current line item
titled ``Distribution and/or Service (12b-1) Fees'' and add, as
necessary, two items for the fees permitted under the proposal--
``Marketing and Service Fee'' and ``Ongoing Sales Charge.'' Funds that
do not currently charge asset-based distribution fees would not be
affected by these proposed amendments. The staff estimates that funds
that charge asset-based distribution fees would be able to complete the
revised fee table in the same amount of time, and for the same cost
because the revised fee table only includes data that is readily
available when the fund regularly updates the fee table, and does not
include any new information. The revised fee table would not be
significantly longer, and would instead simply include a new line item,
which is a breakdown of an existing line item, that was already known
when the fee was instituted.\519\ Therefore, the staff estimates that
the proposed new line items in the fee table would not increase costs
or the amount of time required to complete Form N-1A, either initially
or when submitting a post-effective amendment.
---------------------------------------------------------------------------

    \519\ 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, the staff separately
estimates the burden for each type of filing.
---------------------------------------------------------------------------

    The proposal would also significantly revise the disclosure
required for funds with 12b-1 fees in the prospectus narrative and in
the SAI. These proposed amendments would eliminate many disclosures
that would become outdated or irrelevant based on our proposed rule
changes, including some of the most detailed disclosures of the dollar
amount the fund spends on each distribution activity. However, some of
the other disclosure requirements regarding asset-based distribution
fees currently in Form N-1A would be retained in the same or similar
form.\520\ Thus, we anticipate that the proposed amendments would
reduce the amount of time needed to provide disclosure on asset-based
distribution fees on an ongoing basis, although some one-time costs may
be incurred to initially revise and update the prospectus to conform
its description regarding asset-based distribution fees to the proposed
new framework.
---------------------------------------------------------------------------

    \520\ See Section III.J, supra.
---------------------------------------------------------------------------

    In our 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 includes time spent by inside counsel,
back office personnel, compliance professionals, and others in filling
out the form. The costs include that of outside counsel to prepare and
review these filings. We assume that only funds that charge asset-based
distribution fees would be affected by our proposed amendments to Form
N-1A. The staff estimates that, each year, there are approximately 7367
funds with 12b-1 plans that file post-effective amendments.
    The staff estimates that our proposed amendments would result in
time savings of approximately 10 hours for each portfolio'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).
The staff further estimates that the amendments would reduce costs
spent on outside counsel, and other costs 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). In addition, the staff estimates that each fund
would incur a total one-time cost of $2000 and a one-time time
expenditure of 10 hours of attorney time at a rate of $316 per hour to
initially revise their post effective amendments to Form N-1A to meet
the requirements of the proposed amendments for the first time.
    The staff estimates that, in each year following the effective date
of the proposed amendments, 300 additional funds with asset-based
distribution fees would file an initial Form N-1A. Based on these
estimates, the staff estimates that funds would save a total of 3000
hours (at an internal time cost equivalent of $948,000) \521\ and
$150,000 when submitting initial Form N-1A filings each year.\522\ In
addition, the staff anticipates that funds would save approximately
7367 hours (at an internal time cost equivalent of $2,327,972)\523\,
and $1,050,050 annually when preparing post-effective updates to Form
N-1A.\524\ Finally, the staff estimates that all funds with asset-based
distribution fees would incur a total one-time expenditure of 73,670
hours (at an internal time cost equivalent of $23,279,720) and a cost
of $14,734,000 when preparing post-effective amendments to comply with
the proposed amendments for the first time.\525\
---------------------------------------------------------------------------

    \521\ This estimate is based on the following calculation: (300
new filers x 10 hours savings = 3,000 hours in total savings);
(3,000 hours x $316 per hour = $948,000).
    \522\ This estimate is based on the following calculations: (300
new filers x $500 savings = $150,000 total savings).
    \523\ This estimate is based on the following calculation:
(7,367 amendments x 1 hour savings = 7,367 hours in total savings);
(7,367 hours x $316 per hour = $2,327,972).
    \524\ This estimate is based on the following calculations:
(7,367 amendments x $150 savings = $1,105,050 total savings).
    \525\ This estimate is based on the following calculations:
(7,367 amendments x 10 hours expended = 73,670 hours); (73,670 hours
x 316 per hour = $23,279,720); (7,367 amendments x $2,000 costs =
$14,734,000 total one-time costs).
---------------------------------------------------------------------------

     We request comment on these estimates and assumptions.
2. N-SAR Periodic Reporting
    Our proposal would amend the instructions to Form N-SAR, which
currently requires funds to respond to a series of questions regarding
their 12b-1 plans. Form N-SAR is the form that registered investment
companies use to make periodic reports to the Commission. 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 staff estimates that there are approximately 1292 management
investment companies that respond to Items 41-44 of Form N-SAR. 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) would no longer maintain grandfathered share classes and would
then experience the estimated savings, while the remaining 80% (or
1034) would 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 respondent 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 total incremental time savings of approximately 129
hours (with a total internal time equivalent cost savings of $40,764)
\526\ annually.
---------------------------------------------------------------------------

    \526\ This estimate is based on the following calculation: (258
x 0.5 hours = 129 hours); (129 hours x $316 per hour = $40,764).
---------------------------------------------------------------------------

     We request comment on these estimates and assumptions.
3. Regulation S-X
    As discussed in Section III.L of this Release, we are proposing
changes to rule 6-07 of Regulation S-X, which requires funds to file a
statement of operations listing income and expenses, and state
separately all amounts paid in accordance with a 12b-1 plan. Our
proposal would conform the disclosure requirement to the terms of our
proposed new rule and rule amendments regarding asset-based
distribution fees, by requiring that funds state separately amounts
charged for marketing and service fees and ongoing sales charges.
    Our understanding is that funds already have information on asset-
based distribution fees available in order to prepare the statement of
operations as we have proposed. Funds analyze this information as a
matter of course for ordinary business and tax reasons, and therefore
our proposed changes to Regulation S-X would not require the
preparation of new information. Accordingly, the staff estimates that
our proposed changes to Regulation S-X would not change the amount of
time or the costs required for funds to prepare their statements of
operations under the regulation.
     We request comment on these estimates and assumptions.
4. Form N-3, N-4, and N-6
    The proposal would revise the currently required disclosure for
12b-1 plans in the prospectus narrative and in the SAI of Form N-3.
These proposed amendments would eliminate disclosures that would become
outdated or irrelevant based on our proposed rule changes, including
some of the most detailed disclosures of the exact dollar amount the
registrant spends on each distribution activity. However, much of the
general disclosures regarding asset-based distribution fees currently
in Form N-3 would be retained in the same or similar form.\527\
---------------------------------------------------------------------------

    \527\ See supra Section III.L.
---------------------------------------------------------------------------

    In our most recent Paperwork Reduction Act submission for Form N-3,
the staff estimated that for each portfolio, the initial filing burden
is approximately 922.7 hours at a cost of $20,300, and the post-
effective amendment burden is approximately 154.7 hours at a cost of
$7650. 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.
    The staff assumes that 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. The staff estimates that it would cost this registrant
approximately $2000 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 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 Form N-3. 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 as a result of the proposed rule and rule
amendments.
     We request comment on any of these estimates or
assumptions.
    Our proposal would also amend Forms N-4 and N-6 to conform them to
the new rule and rule amendments that we are proposing today.\528\ The
proposed form amendments would replace references to rule 12b-1 with
references to proposed rules 6c-10(b), 12b-2(b) or 12b-12(d), as
appropriate. We expect this would benefit investors because it would
more accurately describe these fees.
---------------------------------------------------------------------------

    \528\ Form N-3 is used by separate accounts offering variable
annuity contracts that are registered as management investment
companies. Form N-4 is used by separate accounts offering variable
annuity contracts and are registered as unit investment trusts. Form
N-6 is used by separate accounts offering variable life insurance
contracts and are registered as unit investment trusts.
---------------------------------------------------------------------------

    The staff estimates that the proposed amendments to these forms
would not change current estimates of the amount of time or costs
associated with completing the forms because they are primarily
technical and only conform the disclosure to the proposal. Therefore,
we estimate no costs will result from these proposed Form N-4 and N-6
changes.
     We request comment on these estimates and assumptions.
5. Streamlined Proxy Procedure
    Our proposal would eliminate a number of disclosures in Schedule
14A (the form for proxy statements) that would become irrelevant in
light of the proposed rule and rule amendments.\529\ We anticipate that
the proposed amendments would result in cost savings to funds that
prepare such proxies when obtaining shareholder consent to increase or
implement marketing and service fees.
---------------------------------------------------------------------------

    \529\ See proposed Item 22 of Schedule 14A.
---------------------------------------------------------------------------

    Funds that rely on proposed rule 12b-2(d) would not be permitted to
institute new 12b-1 plans or increase the rate of a 12b-1 fee under an
existing plan after the rule's compliance date, and therefore they
would no longer solicit proxies in relation to their 12b-1 plans.
Proposed rule 12b-2(b) would require a shareholder vote and attendant
proxy solicitation when a fund institutes or increases a marketing and
service fee in existing share classes.\530\
---------------------------------------------------------------------------

    \530\ As discussed in Section III.N.4 of this Release, supra, we
would not require a shareholder vote if a 12b-1 fee is relabeled a
marketing and service fee, provided the fee is 25 basis points or
less and is not increased.
---------------------------------------------------------------------------

    Commission staff estimates that approximately 3 funds would solicit
proxies each year for the purposes of implementing or increasing a fee
under

proposed rule 12b-2(b) (the same number that we have previously
estimated would solicit proxies under rule 12b-1). Funds typically hire
outside legal counsel and proxy solicitation firms to prepare, print,
and mail these proxies. For each of these 3 funds, the staff estimates
that our proposed amendments to Schedule 14A would result in an
incremental burden reduction of 3 hours of internal personnel time (at
an internal time cost equivalent rate of $316 per hour) and reduced
costs of $400 for the services of outside professionals. The staff
therefore estimates that these amendments will reduce the total annual
costs of soliciting proxies and completing Schedule 14A by
approximately 9 hours of internal personnel time (3 funds x 3 hours) at
a internal time cost equivalent of $2,844 \531\ and approximately $1200
(3 funds x $400) for the services of outside professionals.
---------------------------------------------------------------------------

    \531\ This estimate is based on the following calculation: (9
hours x $316 per hour = $2844).
---------------------------------------------------------------------------

H. Account-Level Sales Charge Alternative

    Proposed rule 6c-10(c) would provide funds the option of offering a
class of fund shares that could be sold by dealers with sales charges
set at negotiated rates. The sales charge could vary in amount, or time
of payment, and could better reflect services provided by the broker.
We assume that a limited number of funds would choose to rely on this
exemption immediately, and that reliance on the exemption may increase
over time as funds and dealers better understand the costs and benefits
associated with a different business model.
1. Benefits
    Some of the benefits that may derive from this exemption include
enhanced competition in fund distribution, greater transparency of
distribution charges for fund investors, and reduced conflicts for
broker-dealers selling funds with different compensation
structures.\532\ Other benefits include less complicated distribution
structures and reduced training required for registered representatives
of broker-dealers. This part of the proposal could also prompt new
innovative fund distribution systems and allow the development of new
business models. We discuss the many other potential benefits of this
proposal in detail in Sections III.I and III.M above.
---------------------------------------------------------------------------

    \532\ We have not received any applications for an exemption
from section 22(d) that are similar to our proposal, so we assume
the proposal would not result in cost savings related to reduced
preparation and processing of exemptive applications.
---------------------------------------------------------------------------

2. Costs
    Proposed rule 6c-10(c) is elective, and thus only funds or dealers
that choose to rely on it would incur the costs of complying with its
conditions. Proposed rule 6c-10(c) requires a fund that chooses to rely
on the exemption to meet the following two conditions: (i) The fund
must not deduct an ongoing sales charge pursuant to proposed rule 6c-
10(b); and (ii) the fund must disclose that it has elected to rely on
the exemption in its registration statement. The first condition
(prohibiting funds from deducting an ongoing sales charge) should not
impose any costs on funds. We expect that any fund that relies on
proposed rule 6c-10(c) would do so as part of the creation of a new
fund or fund class, and that therefore no funds with ongoing sales
charges would incur costs in eliminating these charges.
    We estimate that funds may incur some minor costs in complying with
the second condition, the requirement to disclose the election to rely
on proposed rule 6c-10(c) in their registration statement. The staff
estimates that to make the required disclosure on the registration
statement it would require one hour of time spent by outside counsel,
charged at the rate of $400 per hour. Once the disclosure has been
initially made on the registration statement, the staff estimates that
there would be no further costs or time to update or revise the
election, and therefore there would be no annual costs. Thus, the staff
estimates that the cost of complying with the conditions in relying on
rule 6c-10(c) would be a one-time initial cost of $400 per fund. The
staff estimates that between 10 and 100 new funds might rely on
proposed 6c-10(c) for the first time each year, and therefore estimate
that the total costs for all funds to comply with the proposed
exemption would be between $4000 and $40,000 \533\ in one-time costs
(to newly formed funds) each year.
---------------------------------------------------------------------------

    \533\ This estimate is based on the following calculations: (10
funds x $400 = $4000; 100 funds x $400 = $40,000).
---------------------------------------------------------------------------

    We anticipate that funds that rely on proposed rule 6c-10(c) would
do so as part of a decision to provide competitive alternatives to
other distribution models, and that any other costs not imposed by the
conditions of the rule to establish the structure would be justified by
the anticipated benefits accruing to the fund. Other such costs to
establish the new distribution structure might include setting up new
classes of the fund, negotiating new distribution agreements with
broker-dealers, and educating investors and financial representatives
about the new fee structure.\534\ The decision to rely on the proposed
rule would be driven by business factors, and the potential for new
markets and customers. Funds and broker-dealers that do not choose to
rely on this exemption would not bear any costs related to the proposed
rule.\535\
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    \534\ Based on discussions with one fund, that fund suggested
that these and similar efforts could include one-time costs of
$550,000 and ongoing costs of $250,000 annually per fund family.
    \535\ Broker-dealers could face certain difficulties related to
``investor portability'' or account transfers for investors in
classes that rely on the proposed rule. Broker-dealers may encounter
recordkeeping or other issues when an investor account that holds
fund shares in such a class is transferred to a broker-dealer that
only sells shares of the fund with asset-based distribution fees.
Broker-dealers currently face this issue when transferring investor
accounts today (if, for example, the transferred account includes
shares of a fund that the new broker-dealer does not sell), although
it may be exacerbated by the different fee structure the exemption
offers.
---------------------------------------------------------------------------

    We request comment on the discussion of the costs and benefits of
our proposed rule 6c-10(c).
     Are there any costs that this exemption would impose on
funds or others? What other benefits might it provide? What should we
assume about the compensation structure that brokers would design? How
many funds are likely to take advantage of this exemption, and what
kind of factors would drive this choice? What kind of costs would these
funds incur? Are our estimates of the cost of complying with the
conditions of the exemptions reasonable?
    As discussed previously, our experience with unfixing commission
rates leads us to expect that when sales loads are subject to market
pressure, sales loads will go down for all investors. However, we
acknowledge the potential that some investors (perhaps due to a lack of
bargaining power) may pay higher sales loads under proposed rule 6c-
10(c) than they might have under the fixed sales load regime of section
22(d). We request comment as to whether investors are likely to pay
lower (or higher) sales loads if they purchase fund shares from a fund
taking advantage of the proposed exemption.
     Are investors likely to experience any other costs or
benefits as a consequence of the proposed exemption? If the exemption
is widely relied upon, what might be the effect on distribution
arrangements, and on distributors that do not rely on the rule?

I. Director Responsibilities

    Board of directors' responsibilities would change under the
proposal because we would not require directors to adopt and annually
renew a 12b-1 plan or make any special findings.\536\ The proposal
would not impose other procedural requirements currently in rule 12b-1,
including the requirements for quarterly review. Although the proposal
would eliminate director specific oversight requirements, directors
would still have a fiduciary obligation to consider whether the asset-
based distribution fees are in the best interest of the fund and fund
shareholders.
---------------------------------------------------------------------------

    \536\ Our proposed rescission of rule 12b-1 would also eliminate
the recordkeeping requirements in rule 12b-1(f) to maintain copies
of the plan, reports or any other agreements related to the plan.
Although our proposal would not impose recordkeeping requirements,
we do not anticipate that funds would realize any cost savings as a
result of this amendment, because they would continue to maintain
records regarding their asset-based distribution fees to prepare
their financial statements.
---------------------------------------------------------------------------

1. Benefits
    We expect that the proposed reduction in formal requirements
regarding the approval of asset-based distribution fees would result in
significant cost and time savings for funds and their investors. The
staff has estimated in our most recent Paperwork Reduction Act analysis
for rule 12b-1 that, for each fund family that has at least one fund
with a 12b-1 plan, it takes approximately 425 hours for the fund's
directors, counsel, accountants, and other staff to maintain the plan,
prepare and evaluate quarterly reports, make the necessary findings,
and hold director votes, at an internal time cost of $99,811 per fund
family. The staff estimates that there are approximately 379 fund
families with at least one fund that charges 12b-1 fees. Therefore, the
staff estimates that for all fund families with a 12b-1 plan, funds
expend a total of 161,075 hours at an internal time cost of
$37,828,369.\537\
---------------------------------------------------------------------------

    \537\ These estimates are based on the following calculations:
(425 hours x 379 fund families = 161,075 hours; $99,811 x 379 fund
families = $37,828,369).
---------------------------------------------------------------------------

    The staff estimates that our proposal would reduce this burden by
approximately 75% (proportionately for all fund employees) for an
annual hour reduction for each fund family of 319 hours, and a $74,858
reduction in internal costs.\538\ If our proposal is adopted, we
estimate that funds, their employees (or the employees of the adviser),
and directors would only need to spend 106 hours instead of 425 hours
annually on asset-based distribution fee matters pursuant to rules 12b-
2 and 6c-10, at an internal cost of $24,953 instead of $99,811.\539\
Therefore, the staff estimates that our proposed amendments to director
responsibilities and the proposed removal of rule 12b-1 would reduce
this total time from a total of 161,075 hours per year at an internal
cost of $37,828,369, to 40,269 hours at an annual cost of $9,457,092
\540\ resulting in an annual savings of 120,806 hours and $28,371,277
dollars.\541\
---------------------------------------------------------------------------

    \538\ This estimate applies to both funds that deduct asset-
based distribution fees under proposed rules 12b-2(b) and 6c-10, and
to funds that deduct grandfathered 12b-1 fees pursuant to proposed
rule 12b-2(d).
    \539\ These estimates are based on the following calculations:
(425 hours x 25% = 106 hours; $99,811 x 25% = $24,953).
    \540\ These estimates are based on the following calculations:
(161,075 hours x 25% = 40,269 hours; $37,828,369 x 25% =
$9,457,092).
    \541\ These estimates are based on the following calculations:
(161,075 hours x 75% = 120,806 hours; $37,828,369 x 25% =
$28,371,277).
---------------------------------------------------------------------------

     We request comment on these estimates and assumptions.
2. Costs
    Other than the time expenditures we have outlined previously in
this analysis, we do not expect that there will be any costs associated
with our proposed removal of rule 12b-1 and clarification of director
responsibilities in our proposal. As discussed above, we anticipate
that the proposed changes would simplify the requirements for imposing
asset-based distribution fees compared to the current requirements of
rule 12b-1. Costs that a fund might incur in connection with revising
disclosures regarding asset-based distribution fees are discussed
above.\542\
---------------------------------------------------------------------------

    \542\ See supra Section V.G of this Release.
---------------------------------------------------------------------------

     We request comment on these estimates and assumptions.

J. 11a-3 Amendments

    We are also proposing to amend rule 11a-3 (which governs sales
loads on offers of exchange within a fund family) to bring it into
conformity with the proposed treatment of ongoing sales charges we
describe in this Release. The proposed amendments would require funds
to give shareholders ``credit'' against the rate of any sales load owed
for ongoing sales charges paid by investors who exchange fund shares
within a fund group.\543\
---------------------------------------------------------------------------

    \543\ A more detailed description of these amendments is
included in Section III.K of this Release, supra.
---------------------------------------------------------------------------

1. Benefits
    We anticipate that the proposed amendments to rule 11a-3 would
provide a number of benefits. Some of the principal benefits include
more equitable treatment of investors who pay sales charges, whether
with the initial investment, or over time, and greater transparency in
sales charges paid.
2. Costs
    Based on conversations with industry representatives, the staff
understands that most funds that currently rely on the exemptive relief
provided by rule 11a-3 have systems that can credit ongoing sales
charges in the way the proposed amendments would require. In order to
process credits for CDSLs (and other purposes), funds (or their
transfer agents) use a bucketing system that allows them to track the
history of fund shares. The staff understands that these existing
systems can track the length of time shares subject to an ongoing sales
charges have been held, determine the charges that have been paid, and
credit those charges against any load imposed on the new shares
acquired in an exchange. The staff understands that most funds
generally limit exchanges to shares of the same class in other funds
within the fund group. As a result, when transferred, the ongoing sales
charge and conversion date of both the exchanged and acquired shares
would generally be the same, if the maximum sales load remains the
same. In those circumstances, no action would be required on the part
of the fund or its transfer agent. Alternatively, the conversion date
may need to be changed (if, for example, the maximum sales loads of the
two funds are different). We expect that most funds should be able to
comply with our proposed 11a-3 amendments with little difficulty.
    Funds may still need to update their systems for share exchanges
and enhance their capacity to include shares with ongoing sales
charges. The staff therefore estimates that a typical fund family with
funds that deduct ongoing sales charges (or the fund's transfer agent)
would incur $25,000 in one-time costs to update its systems to comply
with our proposed amendments. For purposes of this analysis, the staff
assumes that all 196 fund families that may be affected by our ongoing
sales charge proposal would incur this cost, for a total cost of
$4,900,000.\544\
---------------------------------------------------------------------------

    \544\ This estimate is based on the following calculation: (196
fund families x $25,000 = $4,900,000).
---------------------------------------------------------------------------

     We request comment on these estimates and assumptions.

K. Other Technical Amendments

    Our proposal would make a number of technical amendments to
Investment Company Act rules and forms, removing current references to
rule 12b-1 and adding references to the appropriate proposed rule.\545\
We do not expect these changes to materially affect funds,
intermediaries, or others, because they are technical changes that
should not affect fund operations. Therefore, we do not believe that
there would be any costs associated with these amendments. We request
comment on this assumption.
---------------------------------------------------------------------------

    \545\ These proposed technical amendments would affect rules
17a-8, 17d-3, 18f-3, and Regulation S-X under the Act. For a
complete discussion of the changes, see Section III.L of this
Release, supra.
---------------------------------------------------------------------------

     Would there be any costs associated with making the
technical changes described in Section III.L above?

L. Rule 10b-10

    The proposed amendments to Exchange Act rule 10b-10 would provide
broker-dealer customers with additional information related to mutual
fund costs and callable securities.
1. Benefits
    The improved disclosure related to mutual fund costs could be
expected to help make the confirmation a more complete record of the
transaction and help mutual fund investors more fully understand the
sales charges they incur. Those improved disclosures could be expected
to promote decision making by investors that more appropriately takes
those costs into account. Those improved disclosures also could be
expected to assist investors in verifying whether they paid the correct
sales charge set forth in the prospectus. The improved disclosure
related to callable debt securities could be expected to help alert
investors to misunderstandings, avoid confusion, promote the timely
resolution of problems, and better enable investors to evaluate
potential future transactions.
2. Costs
    These proposed amendments to rule 10b-10 would require brokers-
dealers to include additional information in confirmations that are
currently sent to investors. The costs of adding this new information
into confirmation disclosures would largely be expected to be one-time
programming-related costs, borne primarily by clearing firms and third-
party service providers, which are included in the estimates of the
Paperwork Reduction Act burden. For purposes of the Paperwork Reduction
Act, the Commission staff has estimated that the one-time burden to
clearing firms with proprietary systems to reprogram software and
otherwise update their systems to enable them to generate confirmations
meeting the requirements of the proposed amendments would be
approximately 720,000 hours.\546\ The staff estimates that this one-
time burden would equal total internal costs of approximately $180.7
million dollars,\547\ or $1.1 million per vendor.\548\ The staff also
estimates that vendor licensors of platforms would incur costs
equivalent to those incurred by clearing firms with proprietary
systems, resulting in one-time burden of 13,500 hours and costs of
approximately $3.4 million dollars,\549\ or $1.1 million per
vendor.\550\ In addition, the staff understands that clearing firm
licensees would incur an additional 800 burden hours each, or 296,000
total, for a total cost of approximately $74.3 million,\551\ or
$200,800 per clearing firm licensee.\552\
---------------------------------------------------------------------------

    \546\ 4,500 burden hours x 160 clearing firms with proprietary
systems = 720,000 burden hours. See note 437 supra and accompanying
text.
    \547\ 720,000 hours x $251 dollars per hour = $180,720,000.
These figures are based on an estimated hourly wage rate of $251.
The estimated wage figure is based on published compensation for
compliance attorneys ($291) and the average costs of a senior
computer programmer ($285) and a computer programmer analyst ($190)
(($190 + $285) / 2 = $238). See Securities Industry and Financial
Markets Association, Management and Professional Earnings in the
Securities Industry (Sept. 2009). The staff estimates that
programmers would utilize 75% of the burden hours to implement
system changes while attorneys would utilize 25% of the burden hours
to review the output, yielding a weighted wage rate of $251 dollars
per hour (($291 x .25) + ($238 x .75)) = $251).
    \548\ 4,500 burden hours x $251 dollars per hour = $1,129,500.
    \549\ 3 vendors x 4,500 burden hours x $251 dollars per hour =
$3,388,500. For purposes of this analysis, the staff assumes that
vendors would incur the same per hour costs and burden hours
incurred by clearing firms with proprietary systems. See note 438
supra.
    \550\ 4500 burden hours per vendor x $251 dollars per hour =
$1,129,500.
    \551\ 370 clearing firm licensees x 800 burden hours x $251
dollars per hour = $74,296,000. For purposes of this analysis, the
staff also assumes that vendors or other third-parties would perform
the work needed to adapt each of these clearing firms' systems to
the changes made to its vendor's platform. The staff further assumes
the hourly costs to clearing firms to outsource these additional
burdens to third-parties would be equivalent to the hourly costs
incurred by vendors and by clearing firms with proprietary systems.
This hourly cost is estimated at approximately $251 per hour. See
note 438 supra.
    \552\ 800 burden hours per clearing firm licensee x $251 per
hour = $200,800.
---------------------------------------------------------------------------

    When we include the costs borne by vendors and clearing firm
licensees, we estimate that total one-time burden as a whole would be
approximately $258.4 million dollars.\553\
---------------------------------------------------------------------------

    \553\ ((3 vendors x 4,500 burden hours) + (370 clearing firm
licensees x 800 burden hours) + (160 clearing firms with proprietary
systems x 4,500 burden hours)) x $251 per hour = $258,404,500. As
discussed above, the staff believes that all parties would incur
costs of $251 per hour.
---------------------------------------------------------------------------

     We request comment on these estimates and assumptions.

M. Total Costs and Benefits

    As discussed above, we have designed our proposal to minimize the
cost impact on funds, intermediaries, and service providers while
maximizing the investor protection and other benefits. The staff
anticipates that funds representing approximately 93% of all assets
under management will incur minor or no expenses in complying with our
proposal.\554\
---------------------------------------------------------------------------

    \554\ See supra Section V.B of this Release.
---------------------------------------------------------------------------

    The staff estimates that the total one-time costs of compliance
with our proposed amendments would be $400,994,000 in outside expenses
and $362,348,000 in internal time cost equivalents. The staff further
estimates the total annual costs of compliance would be $304,076,000.
The staff also estimates that the total annual benefits of compliance
with our proposed amendments would be between $1,062,361,000 to
$1,258,361,000 in cost savings and $31,963,000 in internal time cost
equivalents. This does not reflect our full expectation of the costs
and benefits of the proposed amendments because many of the expected
costs and benefits are qualitative in nature.
     We request comment on these estimates.

N. Request for Comment

    We request comments on all aspects of this cost-benefit analysis,
including identification of any additional costs or benefits of, or
suggested alternatives to, the proposed amendments. Commenters are
requested to provide empirical data and other factual support for their
views to the extent possible. In particular, we request comment on the
quantitative estimates made within this section and any other costs or
benefits that were not discussed here that might result from the
amendments. We encourage commenters to identify, discuss, analyze, and
supply relevant data regarding any additional costs and benefits.

VI. Initial Regulatory Flexibility Analysis

    This Initial Regulatory Flexibility Analysis (``IRFA'') has been
prepared in accordance with 5 U.S.C. 603. It relates to the
Commission's proposed removal

of rule 12b-1, new rule 12b-2, and amendments to rules 6c-10, 10b-10,
11a-3, 17a-8, 17d-3, and 18f-3, and amendments to Forms N-1A, N-3, N-4,
N-6, N-SAR and Regulation S-X and Schedule 14A, under the Securities
Act, the Securities Exchange Act, and the Investment Company Act.

A. Reasons for, and Objectives of, the Proposed Actions

    As more fully described in Sections I, II, and III of this Release,
we are proposing a new rule and rule and form amendments designed to
address funds' use of asset-based distribution fees, to amend our
current regulations to reflect current economic realities and the role
of directors regarding these charges, and to enhance transparency and
equity of these fees for investors. Rule 12b-1, the current rule that
governs the use of asset-based distribution fees, relies on fund
directors to oversee the level and use of these fees. Asset-based
distribution fees have evolved into a substitute for front-end loads,
and have also enabled the development of new models of fund
distribution that could not have been anticipated when the rule was
adopted. Small funds, in particular, often rely on asset-based
distribution fees as a means of gaining access to distribution channels
that would not otherwise be available to them.\555\
---------------------------------------------------------------------------

    \555\ See, e.g., Roundtable Transcript, supra note 109, at 67-68
(statement of Mellody Hobson, Ariel Capital Management, LLC), and
discussion of the impact of the proposal on small funds, Section
III.M, supra.
---------------------------------------------------------------------------

    The proposal is also designed to improve investor understanding of
these fees and their purposes, as well as to enhance equity in the
amount of distribution costs all fund shareholders pay, regardless of
the method of payment. Currently, investors may not understand that
asset-based distribution fees are the equivalent of sales loads, and
some investors may believe that they have avoided a sales load entirely
by purchasing a share class that charges an asset-based distribution
fee. In addition, under current distribution practices, certain long-
term shareholders that pay asset-based distribution fees may subsidize
the distribution expenses of other shareholders in the fund. As a
result, some fund shareholders may pay a disproportionate amount of the
fund's distribution expenses.
    Our proposed new rule, and rule and form amendments, would
significantly revise our current regulations regarding asset-based
distribution fees by eliminating the specific requirements for the
board of directors. The proposal would recognize that funds bear
ongoing expenses that, although they are distribution related, may
benefit the fund and fund shareholders, and would replace the specific
formal requirements for the board with other regulatory protections. In
particular, the proposal would recognize that asset-based distribution
fees may be used as a substitute for a sales load, and would regulate
them in a similar manner. We expect that this would give directors more
time to focus on other important fund matters. In order to provide
greater equity among shareholders who bear distribution fees, the
proposal would limit the amount of asset-based distribution fees that
may be charged to each investor. Funds would be required to convert
shares that have an ongoing sales charge to a class that does not
impose an ongoing sales charge no later than when the cumulative
charges equal the amount of the highest front-end load that the
investor would have paid had the investor invested in another class of
shares in the same fund, or after a set conversion period based on the
rate of the front-end load and the rate of the ongoing sales charge
imposed.
    In addition, the proposal would allow funds that deduct a marketing
and service fee pursuant to rule 12b-2 to sell their shares at other
than the public offering price as disclosed in their prospectus. This
would enable funds to offer new choices to investors in paying for the
costs of distribution; enhance competition in pricing between broker-
dealers in the sale of fund shares; and present new business
opportunities to funds that choose to use this exemption. We believe
small funds may be the funds that are more likely to so experiment and
use this exemption to expand their market opportunities.
    Finally, the proposal would also make a number of changes to
current disclosure requirements designed to enhance investor
understanding of these fees. In particular, the proposal would require
the prospectus fee table to state separately (i) the amount of asset-
based distribution fees that pays for services received by shareholders
in the fund and for other general distribution purposes (the marketing
and service fee), and (ii) the amount of asset-based distribution fees
that are a substitute for a sales load (the ongoing sales charge). This
disclosure is designed to allow fund shareholders to understand better
the purpose of these fees, and the amounts they are paying. The
proposal would also make a number of conforming changes to other rules
and forms that are intended to update current references to rule 12b-1
to reflect the regulations we are proposing today, as well as
eliminating or updating requirements that would become irrelevant if
our proposal were adopted. The proposal further would make changes to
rule 10b-10 to improve disclosure on broker-dealer confirmations of
costs related to mutual funds and to make other improvements.

B. Legal Basis

    The Commission is proposing amendments to Schedule 14A under the
authority set forth in sections 3(b), 10, 13, 14, 15, 23(a), and 36 of
the Exchange Act [15 U.S.C. 78c(b), 78j, 78m, 78n, 78o, 78w(a), and
78mm], and sections 20(a), 30(a), and 38(a) of the Investment Company
Act [15 U.S.C. 80a-20(a), 80a-29(a), and 80a-37(a)]. The Commission is
proposing amendments to rule 6-07 of Regulation S-X under the authority
set forth in section 7 of the Securities Act [15 U.S.C. 77g] and
sections 8 and 38(a) of the Investment Company Act [15 U.S.C. 80a-8,
80a-37(a)].
    The Commission is proposing to remove rule 12b-1 under the
authority set forth in sections 12(b) and 38(a) of the Investment
Company Act [15 U.S.C. 80a-12(b) and 80a-37(a)]. The Commission is
proposing new rule 12b-2 under the authority set forth in sections
12(b) and 38(a) of the Investment Company Act [15 U.S.C. 80a-12(b) and
80a-37(a)]. The Commission is proposing amendments to rule 6c-10 under
the authority set forth in sections 6(c), 12(b), 22(d)(iii), and 38(a)
of the Investment Company Act [15 U.S.C. 80a-6(c), 80a-12(b), 80a-
22(d)(iii) and 80a-37(a)]. The Commission is proposing amendments to
rules 11a-3, 17a-8, 17d-3, and 18f-3 under the authority set forth in
sections 6(c), 11(a), 17(d), 18(i), and 38(a) of the Investment Company
Act [15 U.S.C. 80a-6(c), 80a-11(a), 80a-17(d), 80a-18(i) and 80a-
37(a)].
    The Commission is proposing amendments to Form N-SAR under the
authority set forth in sections 10(b), 13, 15(d), 23(a), and 36 of the
Securities Exchange Act [15 U.S.C. 78j(b), 78m, 78o(d), 78w(a), and
78mm], and sections 8, 13(c), 24(a), 30, and 38 of the Investment
Company Act [15 U.S.C. 80a-8, 80a-13(c), 80a-24(a), 80a-29, and 80a-
37]. The Commission is proposing amendments to registration Forms N-1A,
N-3, N-4, and N-6, under the authority set forth in sections 6, 7(a),
10, and 19(a) of the Securities Act [15 U.S.C. 77f, 77g(a), 77j,
77s(a)], and sections 8(b), 24(a), and 30 of the Investment Company Act
[15 U.S.C. 80a-8(b), 80a-24(a), and 80a-29]. The Commission is
proposing amendments to Exchange Act rule 10b-10 pursuant to the
authority conferred by the Exchange Act, including sections 10, 17,

23(a), and 36(a)(1) [15 U.S.C. 78j, 78q, 78w(a), and 78mm(a)(1)].

C. Small Entities Subject to the Rule

    For purposes of the Regulatory Flexibility Act, an investment
company is a small entity if it, together with other investment
companies in the same group of related investment companies, has net
assets of $50 million or less as of the end of its most recent fiscal
year. Based on a review of filings submitted to the Commission,
approximately 108 investment companies registered on Form N-1A meet
this definition. These funds have approximately 189 classes. Commission
staff estimates that 40 of these investment companies have at least one
class that charges 12b-1 fees, with approximately 78 classes that
deduct 12b-1 fees. Of those 78 classes, 23 charge 12b-1 fees in excess
of 25 basis points, while the remaining 55 classes charge 12b-1 fees of
less than 25 basis points.
    For purposes of the Regulatory Flexibility Act, a broker-dealer is
a small business if it had total capital (net worth plus subordinated
liabilities) of less than $500,000 on the date in the prior fiscal year
as of which its audited financial statements were prepared pursuant to
rule 17a-5(d) of the Exchange Act or, if not required to file such
statements, a broker-dealer that had total capital (net worth plus
subordinated liabilities) of less than $500,000 on the last business
day of the preceding fiscal year (or in the time that it has been in
business, if shorter) and if it is not an affiliate of an entity that
is not a small business.\556\ The Commission staff estimates that
approximately 862 broker-dealers meet this definition.\557\ Of these,
however, only 17 clearing firms can be classified as small entities
that would likely incur the costs of adopting the proposed amendments
to rule 10b-10.\558\
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    \556\ 17 CFR 240.0-10.
    \557\ This estimate is based on information provided in FOCUS
Reports filed with the Commission in 2009.
    \558\ As discussed above, although there are approximately 5035
broker-dealers registered with the Commission to whom the rule would
apply, the staff believes that the costs of implementing the
proposed changes to rule 10b-10 would be primarily borne by clearing
firms. Also as discussed above, the staff estimates that there are
approximately 530 clearing firms. Based on FOCUS Reports filed with
the Commission in 2009, the staff believes that of these 530
clearing firms, approximately 17 come within the definition of a
small entity.
---------------------------------------------------------------------------

D. Reporting, Recordkeeping, and Other Compliance Requirements

    Our proposal would amend the reporting, recordkeeping, and other
compliance requirements for all funds (including small entities) that
comply with rule 12b-1, or would comply with proposed rule 12b-2,
proposed amendments to rules 6c-10, 11a-3, 17a-8, 17d-3, and 18f-3, or
that would respond to amended Forms N-1A, N-3, N-4, N-6, N-SAR,
Schedule 14A and Regulation S-X.\559\ We have estimated the costs of
these amendments for all marketplace participants previously in the
cost-benefit analysis in Section V. above. No new classes of skills
would be required to comply with our proposed new rule, or rule and
form amendments.
---------------------------------------------------------------------------

    \559\ For a complete discussion of the specifics of the new rule
and rule and form amendments, see Section III, supra.
---------------------------------------------------------------------------

1. Rule 6c-10
    The proposed amendments to rule 6c-10(b) would allow a fund to
deduct asset-based distribution fees from fund assets in excess of
asset-based fees permitted under proposed rule 12b-2 (an ``ongoing
sales charge''), provided shares sold subject to such an ongoing sales
charge convert to another class of shares without an ongoing sales
charge when the shareholder has paid cumulative charges or rates of
fees that are equivalent to what he or she would have paid for shares
subject to a front-end sales load. Rule 6c-10(c) would allow funds to
sell shares at a price other than described in the prospectus. This
provision is an exemption, and thus would not create any new
recordkeeping, reporting, or compliance requirements for small entities
unless they chose to rely on the exemption.
    The proposed amendments would not impose any new reporting
obligations on small entities. However, small entities that charge an
ongoing sales charge would be required to keep certain new records
regarding the length of time that a shareholder holds shares and would
be required to comply with the new requirement for conversion of those
shares. Commission staff has estimated the costs of these requirements
for all funds (including small entities) in the cost-benefit analysis
in Section V above. We do not anticipate that small funds would face
unique or special burdens when complying with the proposed amendments
to rule 6c-10.
2. Removal of Rule 12b-1
    We are proposing to remove rule 12b-1. As discussed above,
Commission staff has estimated that the proposed removal would reduce
costs significantly for affected funds, including the 40 small funds
that the Commission staff estimates have at least one class that
currently charges 12b-1 fees. The proposal would eliminate existing
recordkeeping, reporting, and compliance requirements, and would not
create any new ones.
3. Rule 12b-2
    The proposal would include new rule 12b-2, which would permit funds
to deduct a ``marketing and service fee'' from fund assets, limited to
the amount established in the NASD sales charge rule for ``service
fees.'' Any assets a fund deducts in excess of the marketing and
service fee would be regulated under rule 6c-10 as an ongoing sales
charge. The proposal would also permit funds to continue to charge 12b-
1 fees on shares sold prior to the compliance date of the rule and rule
amendments, if they are adopted, and would continue to regulate the use
of fund assets to pay for brokerage as under rule 12b-1(h) (by
including a similar provision in proposed rule 12b-2). We have
previously estimated that almost all funds (including small funds) that
currently charge 25 basis points or less in asset-based distribution
fees under rule 12b-1 would incur no additional reporting,
recordkeeping, or compliance requirements under proposed rule 12b-2.
4. Rule 11a-3
    As previously discussed, our proposal would amend rule 11a-3 to
ensure that funds give credit for ongoing sales charges when an
investor exchanges fund shares within a fund family. The proposed
amendments would expand current recordkeeping responsibilities for
funds that charge an ongoing sales charge, including small funds.
Commission staff has estimated the costs of these changes for all funds
in the cost-benefit analysis in Section V above. The staff estimates
that 40 funds qualify as small entities for purposes of the Regulatory
Flexibility Act, and that they would incur the same costs of compliance
($25,000, as estimated in section V.K above) to comply with the
proposed amendments to rule 11a-3 as larger funds, because these funds
use similar computer systems and/or transfer agents to track share
exchanges. Although the volume of rule 11a-3 share exchanges may be
less for small funds, with comparably lower costs of expanding the
systems to handle exchanges as compared to larger funds, the staff
estimates that any expenses incurred in upgrading these systems to meet
the compliance requirements of our proposal would be comparable, due to
a lack of bargaining power and economies of scale for the smaller
funds. Therefore, the Commission staff estimates that each small fund
family

that charges 12b-1 fees high enough to qualify as ongoing sales
charges, would incur $25,000 in expenses related to the proposed
amendments to the reporting, recordkeeping, and compliance requirements
of rule 11a-3.
5. Rules 17a-8, 17d-3, and 18f-3
    Our proposal would make technical conforming changes to these rules
as discussed in Section III.L above. Commission staff estimates that
the proposed changes would create no change in the reporting,
recordkeeping, or compliance requirements for funds (including small
funds).
6. Form N-1A
    Form N-1A is the form that open-end mutual funds use to register
with the Commission. 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 line items,
(if relevant) titled ``Marketing and Service Fee'' and ``Ongoing Sales
Charge''; (ii) revise and streamline prospectus narrative disclosure on
asset-based distribution fees; and (iii) revise and streamline SAI
disclosure regarding asset-based distribution fees. The staff estimates
that the proposed changes would reduce costs for all funds, including
small entities, by reducing the amount of time and costs funds incur in
preparing the forms, and would not impose new reporting or
recordkeeping requirements.
7. Form N-3, Form N-4, and Form N-6
    The proposed amendments to Forms N-3, N-4, and N-6 would conform
disclosures in these forms to our proposals.\560\ The proposed
amendments would replace references to rule 12b-1 with references to
proposed rules 6c-10(b) or 12b-2(b) and (d). Form N-3 is the
registration form used by insurance company separate accounts
registered as management investment companies that offer variable
annuity contracts. The proposed amendments to Form N-3 would: (i)
Revise and streamline prospectus narrative disclosure on asset-based
distribution fees; and (ii) revise and streamline Statement of
Additional Information disclosure regarding asset-based distribution
fees. The proposed changes would not impose new reporting or
recordkeeping requirements for Form N-3.
---------------------------------------------------------------------------

    \560\ Form N-3 is used by separate accounts offering variable
annuity contracts and registered as management investment companies.
Form N-4 is used by separate accounts offering variable annuity
contracts and registered as unit investment trusts. Form N-6 is used
by separate accounts offering variable life insurance contracts and
registered as unit investment trusts.
---------------------------------------------------------------------------

    The proposed changes to Forms N-4 and N-6 are technical and
designed to update references to 12b-1 plans to the new terminology
used in our proposal. These proposed changes would not change the
reporting or recordkeeping requirements of these forms. In the cost-
benefit analysis above, we explained that we do not anticipate that
these amendments would result in new costs or burdens associated with
preparing the forms. We do not believe that these amendments will
impose any new recordkeeping, reporting, or compliance requirements.
8. Form N-SAR
    Our proposal would amend the instructions to Form N-SAR, which
currently requires funds to respond to a series of questions regarding
their 12b-1 plans. Form N-SAR is the form that registered investment
companies use to make periodic reports to the Commission. 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 proposal would
impose no new recordkeeping, reporting, or compliance requirements, and
would instead reduce these burdens for respondents that do not have
grandfathered 12b-1 plans.
9. Schedule 14A
    Funds comply with the requirements of Schedule 14A when they
solicit proxies from their shareholders. Our proposal would amend the
required disclosures under section 14A when a fund institutes or
materially increases a marketing and service fee after shares have been
offered to the public. The proposed amendments would streamline proxy
disclosures, removing items that would be superfluous if our proposed
new rules and rule amendments on marketing and service fees were
adopted. As discussed above, we have previously estimated that our
changes to Schedule 14A would not create any new reporting,
recordkeeping, or compliance burdens for funds that solicit proxies,
and would instead reduce the existing burden.
10. Regulation S-X
    Regulation S-X requires funds to file a statement of operations
listing their income and expenses, and to state separately all amounts
paid in accordance with a plan adopted under rule 12b-1. Our proposal
would conform this requirement to the terms of our proposed new rules
and rule amendments regarding asset-based distribution fees. The
proposed amendments to regulation S-X would require that funds state
asset-based distribution fees paid, and state separately amounts paid
pursuant to our proposed rules on marketing and service fees and
ongoing sales charges. Our understanding is that funds, as a matter of
good business practice, already keep the information on asset-based
distribution fees in the proper form, because that information is used
to prepare information on 12b-1 fees, and is a component of the overall
statement of expenses. The staff estimates that our proposed changes to
regulation S-X would not change the amount of time or the costs
required for funds (including small funds) to prepare their statements
of operations. Therefore, we do not expect that these amendments will
impose any new recordkeeping, reporting, or compliance requirements.
11. Rule 10b-10
    Exchange Act rule 10b-10 requires broker-dealers to provide
transaction confirmations to customers. The proposed amendments to this
rule would require disclosure of additional information related to
sales charges in connection with transactions involving mutual funds,
and certain additional information in connection with callable debt
securities. The proposed amendments would expand current recordkeeping
responsibilities for broker-dealers, including small broker-dealers. As
discussed above, the Commission staff estimates that the one-time
burden for clearing firms with proprietary systems associated with
these proposed amendments would equal total internal costs of
approximately $180.7 million dollars \561\ or approximately $1.1
million per clearing firm with a proprietary system.\562\ Also as
discussed above, as a general matter, medium-sized and smaller clearing
firms, and also some larger ones, use platforms licensed from vendors
to generate the data necessary to send confirmations. As discussed

above, the staff understands that there are three primary vendors that
license the majority of platforms to clearing firms that do not have
proprietary systems. In addition, clearing firms may also use vendors
to send physical confirmations to investors. Therefore, these vendors
would have to reprogram their software and update these platforms to
generate the data that would allow their clients to comply with these
proposed amendments to rule 10b-10. Based on discussions with industry
representatives, the staff is of the view that the cost and burdens to
vendors to update the platforms that they license to clearing firms
would be equivalent to the costs and burdens that would be incurred by
clearing firms who would have to reprogram and update their proprietary
systems, resulting in a cost to these vendors of approximately $3.4
million dollars \563\ or $1.1 million per vendor.\564\ In addition, the
staff understands that clearing firm licensees of these platforms would
still incur a one-time cost of approximately $74.3 million dollars
\565\ or $200,800 \566\ per clearing firm licensee, to adopt the
changes made to vendor platforms and to determine whether the output
satisfies the requirements of the proposed amendments.
---------------------------------------------------------------------------

    \561\ (4,500 burden hours x 160 clearing firms with proprietary
systems) x $251 dollars per hour = $180,720,000.
    \562\ 4,500 hours x $251 dollars per hour = $1,129,500. See note
548 supra.
    \563\ (3 vendors x 4500 burden hours) x $251 dollars per hour =
$3,388,500. See note 549 supra.
    \564\ 4500 hours x $251 dollars per hour = $1,129,500. See note
550 supra.
    \565\ (800 burden hours x 370 clearing firms that use vendor
licensed platforms) x $251 per hour = $74,296,000. See note 551
supra.
    \566\ 800 hours x $251 dollars per hour = $200,800. See note 552
supra.
---------------------------------------------------------------------------

    As discussed above, of the approximately 530 clearing firms that
would incur upgrade costs, 17 of those are small entities. The staff
believes that these small entity clearing firms would likely license
their platforms from vendors. Accordingly, the staff estimates that
these firms would incur costs of approximately $200,800 each to adapt
to the changes in vendor platforms, or approximately $3.4 million
total.\567\ These figures are already included in the total burden
costs that clearing firms, and in particular, clearing firm licensees,
would incur to implement the proposed amendments to rule 10b-10.
---------------------------------------------------------------------------

    \567\ (800 burden hours x 17 small entity clearing firms) x $251
per hour = $3,413,600.
---------------------------------------------------------------------------

    In addition, as discussed above,\568\ the staff believes that
clearing firms will bear most of the costs associated with updating
back-office operations to accommodate the proposed changes to rule 10b-
10. Accordingly, the staff does not believe that small introducing
firms will incur these costs.
---------------------------------------------------------------------------

    \568\ See Section IV.H supra.
---------------------------------------------------------------------------

12. Request for Comment
     The Commission solicits comment on these estimates and the
anticipated effect the proposed amendments would have on small entities
subject to the proposed rule and rule and form amendments.

E. Duplicative, Overlapping, or Conflicting Federal Rules

    We have not identified any federal rules that duplicate, overlap,
or conflict with the proposed rule or rule or form amendments.

F. Significant Alternatives

    The Regulatory Flexibility Act directs us to consider significant
alternatives that would accomplish our stated objective, while
minimizing any significant adverse impact on small issuers. In
connection with the proposed amendments, the Commission considered the
following alternatives: (i) The establishment of differing compliance
or reporting requirements or timetables that take into account the
resources available to small entities; (ii) the clarification,
consolidation, or simplification of compliance and reporting
requirements under the proposed amendments for small entities; (iii)
the use of performance rather than design standards; and (iv) an
exemption from coverage of the proposed amendments, or any part
thereof, for small entities.
    Investors in small funds face the same issues as investors in
larger funds when paying asset-based distribution fees. Small funds use
asset-based distribution fees as a means of growing their funds and
accessing alternate distribution channels, and our rule proposal is
designed to allow funds to continue to use asset-based distribution
fees for these purposes. We have endeavored through the proposed
amendments to minimize the regulatory burden on all funds, including
small entities, while meeting our regulatory objectives. We have tried
to design our proposal so that small entities would not be
disadvantaged, and we anticipate that the potential impact of the
proposed rule and amendments on small entities would not be
significant. Small entities should experience the same benefits from
the proposal as other funds. We have endeavored to clarify,
consolidate, and simplify disclosure for all funds, which should be
beneficial for all funds, including those that are small entities.
Moreover, with respect to the proposed revisions to the broker-dealer
confirmation requirements of rule 10b-10, we also believe that special
compliance or reporting requirements for small broker-dealers would not
be appropriate or consistent with investor protection, because
distinguishing such requirements based on the size of the broker-dealer
may be accompanied by disparate treatment of investors and could lead
to investor confusion.
    For these reasons, we have not proposed alternatives to the
proposed rule and rule and form amendments.

G. Request for Comments

    We encourage the submission of comments with respect to any aspect
of the IRFA.
     We particularly request comments on the number of, and the
likely impact on, small entities that would be subject to the proposed
rule, and rule and form amendments. Commenters are asked to describe
the nature of any impact and provide empirical data supporting its
extent. These comments will be considered in connection with any
adoption of the proposed rule and amendments, and reflected in a Final
Regulatory Flexibility Analysis.
    Comments should be submitted in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090. Comments also may be submitted
electronically to the following e-mail address<EMAIL_ADDRESS>
All comment letters should refer to File No. S7-15-10, and this file
number should be included on the subject line if e-mail is used.\569\
Comment letters will be available for Web site viewing and printing in
the Commission's Public Reference Room, 100 F Street, NE., Washington,
DC 20549-1520, on official business days between the hours of 10 a.m.
and 3 p.m. Electronically submitted comment letters also will be posted
on the Commission's Internet Web site (http://www.sec.gov).
---------------------------------------------------------------------------

    \569\ Comments on the IRFA will be placed in the same public
file that contains comments on the proposed rule and amendments.
---------------------------------------------------------------------------

VII. Consideration of Burden on Competition and Promotion of
Efficiency, Competition and Capital Formation

    Section 23(a)(2) of the Exchange Act requires the Commission, in
adopting rules under the Exchange Act, to consider the impact that any
new rule would have on competition, and prohibits the Commission from
adopting any rule that would impose a burden on competition not
necessary or appropriate in furtherance of the purposes of the Exchange
Act.\570\ Section 2(b) of the Securities Act and

section 3(f) of the Exchange Act require the Commission, when engaging
in rulemaking that requires it to consider or determine whether an
action is necessary or appropriate in the public interest to consider,
in addition to the protection of investors, whether the action will
promote efficiency, competition, and capital formation.\571\ Further,
section 2(c) of the Investment Company Act requires the Commission,
when engaging in rulemaking that requires it to consider or determine
whether an action is consistent with the public interest, to consider,
in addition to the protection of investors, whether the action will
promote efficiency, competition, and capital formation.\572\ As
discussed below, we expect that the proposed rule, and rule and form
amendments, may promote efficiency, competition, and capital formation.
---------------------------------------------------------------------------

    \570\ 15 U.S.C. 78w(a)(2).
    \571\ 15 U.S.C. 77b(b); 15 U.S.C. 78c(f).
    \572\ 15 U.S.C. 80a-2(c).
---------------------------------------------------------------------------

A. Removal of Rule 12b-1

    Our proposal would remove rule 12b-1, and in so doing, would
eliminate the explicit requirements in the rule for board approval and
annual review of asset-based distribution fees and written 12b-1 plans.
By eliminating these formal requirements in rule 12b-1, our proposal is
designed to modify the regulations governing these fees to reflect
current economic realities. As discussed in Section V above, funds may
realize significant time and expense savings when managing asset-based
distribution fees under our proposal, compared to the current
requirements of rule 12b-1. Thus, we expect that the proposed removal
of rule 12b-1 would enhance the efficiency of funds in managing and
overseeing the operation and use of asset-based distribution fees.
    Many funds use asset-based distribution fees to pay for
distribution costs in a cost-effective manner that allows them to
compete with other investment products. We expect that, in combination
with the rest of our proposal, our proposed removal of rule 12b-1, if
adopted, would not prevent funds from continuing to access the
competitive benefits of paying for distribution through asset-based
fees. Small funds often use asset-based distribution fees as a means of
building their funds and participating in distribution channels that
they might not otherwise be able to access. We have designed our
proposals to allow funds to continue to grow through these means. In
addition, our proposal would allow funds that currently charge 12b-1
fees to continue to deduct these fees on outstanding shares without
significant disruption. Therefore, we do not anticipate that our
proposal to remove rule 12b-1 would affect capital formation or
competition.

B. Rule 12b-2

    We are proposing to adopt rule 12b-2 (in combination with the rest
of our proposal) to replace rule 12b-1. Proposed rule 12b-2 would allow
funds to deduct a ``marketing and service fee'' from fund assets, up to
the amount permitted for service fees under NASD Conduct Rule 2830. The
proposed amendments would consider any asset-based distribution fee
that exceeds this amount to be an ``ongoing sales charge'' that would
be separately regulated under our proposed amendments to rule 6c-10, as
discussed below. Proposed rule 12b-2 would not require a ``plan'' or
impose other special board requirements to deduct a marketing and
service fee. As discussed above, we expect that the marketing and
service fee under proposed rule 12b-2 would allow funds to continue to
experience the competitive and capital formation benefits resulting
from a 25 basis point asset-based distribution fee. The limited
conditions associated with the proposed rule should allow funds to
impose these fees in a more efficient way. Because all funds would be
able to rely on the proposed rule, and because we do not expect that
the rule would affect the ability of funds to create distribution
structures that fit their competitive model, we do not believe that the
proposed rulemaking would impact competition significantly. We also do
not anticipate that the proposed rule would significantly encourage or
discourage assets being invested in the capital markets, or in
particular funds, and thus do not expect that there would be a
significant impact on capital formation.

C. Amended Rule 6c-10

    Proposed rule 6c-10(b) would treat asset-based distribution fees
deducted in excess of the marketing and service fee as ``ongoing sales
charges.'' The proposal would require that funds convert shares subject
to an ongoing sales charge to a share class without the fee after the
investor has paid cumulative amounts or rates of ongoing sales charges
that equal the fund's front-end load.
    We expect that the ongoing sales charge may allow investors to
better understand the costs of distribution they pay, and would reduce
the potential for some long-time investors to subsidize the
distribution costs of other investors in the same fund. Our proposal
therefore may allow investors who are better informed to allocate their
investments more efficiently. The proposed amendments should also
reduce fund intermediary conflicts of interest when advising investors
regarding fund classes that provide different levels of intermediary
compensation based on the period or method for payment of distribution
fees. This might allow fund intermediaries to spend less time managing
these conflicts and instead allocate their resources more efficiently
towards providing better services to investors and increasing
competition among intermediaries. Because all funds would be able to
rely on the proposed rule, and because we do not expect that the rule
would affect the ability of funds to create distribution structures
that fit their competitive model, we do not believe that the proposed
rulemaking would impact competition significantly. We also do not
anticipate that the proposed rule would significantly encourage or
discourage assets being invested in the capital markets, or in
particular funds, and thus do not expect that there would be a
significant impact on capital formation.
    In addition, the proposed amendments to rule 6c-10(c) would permit
funds to sell their shares at a price other than a current public
offering price as described in the prospectus, which is otherwise
required by section 22(d). Section 22(d) imposes a significant
restriction on competition and the efficient setting of sales loads for
mutual fund distribution, because it effectively requires dealers to
sell fund shares at the same sales load, regardless of the services
provided or the actual cost of distribution. Currently, all investors
in a particular fund class pay the same costs for distribution when
purchasing shares through a fund intermediary, regardless of the
quality or type of services provided by the intermediary. Our proposal
would allow funds to make available a class of shares that
``unbundles'' the costs of distribution from the fund's operating
expenses. This is designed to give funds and intermediaries new avenues
for competition, by permitting funds and intermediaries to break out
the costs of distribution from other services they provide, and letting
investors choose different levels of service based on their needs,
considering among other things, cost and quality of the services
offered.
    Under our proposal, investors would be able to seek out
intermediaries that provide a high level of service, provide simple
execution of fund trades, or provide services that fall somewhere in
the middle. Sales charges would be

transparent and could be imposed or deducted in a manner and at any
time selected by the investor. We expect that this would enhance
efficiency of capital allocation as well as competition among fund
intermediaries by allowing investors to shop for the pricing structure
that best suits the investor's needs and the marketing choices of the
fund or intermediary.\573\
---------------------------------------------------------------------------

    \573\ Some roundtable commenters agreed that the externalization
of asset-based distribution fees could improve competition among
mutual funds. See Comment Letter of Bridgeway Funds, Inc. and
Bridgeway Capital Management, Inc. (July 19, 2007) (``Mutualization
of [12b-1] fees * * * distorts fundamental, free-market economics
and restricts valuable competition in the intermediary channel.'').
---------------------------------------------------------------------------

    Funds that take advantage of the exemption would be able to
effectively externalize the distribution of their shares, an approach
that may encourage small funds and new entrants to the market that are
eager to attract dealers that wish to sell shares based on their own
fee schedules. It may also permit these funds to compete better by
reducing their expense ratios (because it would eliminate, at least
with respect to the particular class, ongoing sales charges), while
still charging low or no front-end sales loads. In addition, innovative
distribution models may encourage additional investors to invest in the
capital markets, enhancing capital formation.
    An externalized approach could simplify the operations of
intermediaries, allowing them to process transactions more efficiently
based on a single, uniform fee structure. In some cases, it could also
simplify fund operations and fund prospectuses by eliminating the need
to offer multiple classes of shares, further reducing fund expenses,
enhancing the efficiency of distribution, and reducing investor
confusion. This type of structure may also help traditional mutual
funds better compete with other investments, such as exchange-traded
funds (ETFs), which have externalized distribution costs and have been
growing in popularity.\574\
---------------------------------------------------------------------------

    \574\ In 2009, ETF assets grew 46 percent (from $531 billion to
$777 billion) while traditional equity and bond mutual fund assets
grew 16 percent (from $9.6 trillion to $11.1 trillion). See 2010 ICI
Fact Book, supra note 6, at 9 and 41.
---------------------------------------------------------------------------

    The proposed exemption is designed to foster price competition
among fund intermediaries that charge for the sale of mutual funds, and
enhance the efficiency of fund operations and investor choice.
Therefore, as discussed above, we expect that the proposed rule
amendments are likely to enhance efficiency, competition, and capital
formation in the fund marketplace.

D. Disclosure Amendments

    Our proposal would amend Forms N-1A, N-SAR, N-3, N-4, and N-6 and
Regulation S-X, to conform them to our proposed treatment of asset-
based distribution fees.\575\ The proposed amendments would improve
disclosure by separately identifying the ``marketing and service fee''
and ``ongoing sales charge'' as individual line items in the fee table
and income statement. The proposed amendments would also streamline
current disclosure regarding asset-based distribution fees by replacing
disclosure made irrelevant by our proposal with more narrowly focused
and precise information regarding asset-based distribution fees. The
proposed disclosure amendments would also replace references to 12b-1
fees in these forms with references to the appropriate rule in our
proposal.
---------------------------------------------------------------------------

    \575\ See supra Section III.
---------------------------------------------------------------------------

    These proposed changes may allow investors to more efficiently
obtain and manage information about their investments, as well as
reduce the time and cost burdens funds bear in preparing this
information. These proposed amendments may lead to increased efficiency
by enhancing the ability of investors to more specifically identify the
costs of distribution they pay when investing in funds. This
information should promote more efficient allocation of investments by
investors among funds because they may compare and choose funds based
on their costs of distribution and the services provided for these fees
more easily. To the extent that these create efficiencies, this may
result in new investors investing in funds (or existing investors
adding additional capital), and could enhance capital formation, and
the efficiency of investors selecting among funds. Because these
disclosure amendments would apply to all funds, we do not expect that
they would have an impact on competition in the fund marketplace.

E. Rule 11a-3 and Technical Amendments

    Our proposal would also make amendments to rule 11a-3 (which
governs the payment of sales loads when making share exchanges within a
fund family) to conform to our proposed treatment of asset-based
distribution fees as sales loads. The proposed amendments would require
funds to credit ongoing sales charges an investor has paid against any
other load owed when the investor exchanges shares within a fund
family. We do not anticipate that these amendments would affect capital
formation or competition, nor would they reduce the efficiency of these
exchanges because they apply to all funds and should not encourage or
discourage investors to invest in the capital markets. We expect that
the proposed amendments may reassure investors that they would not pay
excessive distribution costs when making exchanges within a fund
family, regardless of whether they chose to pay the costs of
distribution front-end, over time, or upon redemption.
    Our proposal would also make technical conforming amendments to
rules 17a-8, 17d-3, and 18f-3, to replace references to rule 12b-1 with
references to the appropriate rule regulating asset-based distribution
fees in our proposal. We do not expect that these changes would affect
the operation of funds, or the behavior of investors, fund
intermediaries, or service providers. Therefore, we do not anticipate
that these proposed amendments would impact competition, efficiency, or
capital formation.

F. Rule 10b-10 Amendments

    Our proposal further would amend rule 10b-10 to provide broker-
dealer customers with improved information in transaction confirmations
about mutual fund sales charges and about information regarding
callable securities. These proposed amendments may lead to increased
efficiency and competitiveness by enhancing the ability of investors to
more specifically understand information related to their transactions
in these securities, which not only would allow them to correct any
associated errors, but also would help inform their future purchases of
securities of this type and promote investment into securities that
bear lower distribution-related costs.

G. Request for Comment

     We request comment on whether the proposed rule and rule
and form amendments, if adopted, would promote efficiency, competition,
and capital formation. We also request comment on any anti-competitive
effects of the proposed amendments. Commenters are requested to provide
empirical data and other factual support for their views, if possible.

VIII. Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996 (``SBREFA''), a rule is ``major'' if it results or is
likely to result in:
     An annual effect on the economy of $100 million or more;

     A major increase in costs or prices for consumers or
individual industries; or
     Significant adverse effects on competition, investment, or
innovation.
    If a rule is ``major,'' its effectiveness will generally be delayed
for 60 days pending Congressional review.
     We request comment on the potential impact of the proposed
rules and rule amendments on the economy on an annual basis. Commenters
are requested to provide empirical data and other factual support for
their views to the extent possible.

IX. Statutory Authority

    The Commission is proposing amendments to rule 6-07 of Regulation
S-X under the authority set forth in section 7 of the Securities Act
[15 U.S.C. 77g] and sections 8 and 38(a) of the Investment Company Act
[15 U.S.C. 80a-8 and 80a-37(a)]. The Commission is proposing amendments
to Schedule 14A under the authority set forth in sections 3(b), 10, 13,
14, 15, 23(a), and 36 of the Securities Exchange Act [15 U.S.C. 78c(b),
78j, 78m, 78n, 78o, 78w(a), and 78mm], and sections 20(a), 30(a), and
38(a) of the Investment Company Act [15 U.S.C. 80a-20(a), 80a-29(a),
and 80a-37(a)].
    The Commission is proposing to rescind rule 12b-1 under the
authority set forth in sections 12(b) and 38(a) of the Investment
Company Act [15 U.S.C. 80a-12(b) and 80a-37(a)]. The Commission is
proposing new rule 12b-2 under the authority set forth in sections
12(b) and 38(a) of the Investment Company Act [15 U.S.C. 80a-12(b) and
80a-37(a)]. The Commission is proposing amendments to rule 6c-10 under
the authority set forth in sections 6(c), 12(b), 22(d)(iii), and 38(a)
of the Investment Company Act [15 U.S.C. 80a-6(c), 80a-12(b), 80a-
22(d)(iii), and 80a-37(a)]. The Commission is proposing amendments to
rules 11a-3, 17a-8, 17d-3, and 18f-3 under the authority set forth in
sections 6(c), 11(a), 17(d), 18(i), and 38(a) of the Investment Company
Act [15 U.S.C. 80a-6(c), 80a-11(a), 80a-17(d), 80a-18(i), and 80a-
37(a)]. The Commission is proposing amendments to Exchange Act rule
10b-10 pursuant to the authority conferred by the Exchange Act,
including Sections 10, 17, 23(a), and 36(a)(1) [15 U.S.C. 78j, 78q,
78w(a), and 78mm(a)(1)].
    The Commission is proposing amendments to registration Forms N-1A,
N-3, N-4, and N-6 under the authority set forth in sections 6, 7(a),
10, and 19(a) of the Securities Act [15 U.S.C. 77f, 77g(a), 77j, and
77s(a)], and sections 8(b), 24(a), and 30 of the Investment Company Act
[15 U.S.C. 80a-8(b), 80a-24(a), and 80a-29]. The Commission is
proposing amendments to Form N-SAR pursuant to authority set forth in
sections 10(b), 13, 15(d), 23(a), and 36 of the Securities Exchange Act
[15 U.S.C. 78j(b), 78m, 78o(d), 78w(a), and 78mm], and sections 8,
13(c), 24(a), 30, and 38 of the Investment Company Act [15 U.S.C. 80a-
8, 80a-13(c), 80a-24(a), 80a-29, and 80a-37].

List of Subjects

17 CFR Part 210

    Accounting, Reporting, and recordkeeping requirements, Securities.

17 CFR Parts 239, 240, and 249

    Reporting and recordkeeping requirements, Securities.

17 CFR Parts 270 and 274

    Investment companies, Reporting and recordkeeping requirements,
Securities.

Text of Proposed Rules and Form Amendments

    For reasons set forth in the preamble, Title 17, Chapter II of the
Code of Federal Regulations is proposed to be amended as follows:

PART 210--FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL
STATEMENTS, SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF
1934, INVESTMENT COMPANY ACT OF 1940, INVESTMENT ADVISERS ACT OF
1940, AND ENERGY POLICY AND CONSERVATION ACT OF 1975

    1. The authority citation for Part 210 continues to read in part as
follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3,
77aa(25), 77aa(26), 77nn(25), 77nn(26), 78(c), 78j-1, 78l, 78m, 78n,
78o(d), 78q, 78u-5, 78w, 78ll, 78mm, 80a-8, 80a-20, 80a-29, 80a-30,
80a-31, 80a-37(a), 80b-3, 80b-11, 7202 and 7262, unless otherwise
noted.

    2. The Part 210 heading is revised as set forth above.
    3. Section 210.6-07 is amended by revising paragraph 2(f) to read
as follows:

Sec.  210.6-07  Statements of operations.

* * * * *
    2. Expenses. * * *
    (f) State separately all fees deducted from fund assets to finance
distribution activities pursuant to Sec. Sec.  270.12b-2(b), (d) or
270.6c-10(b) of this chapter. Reimbursement to the fund of expenses
deducted from fund assets pursuant to Sec. Sec.  270.12b-2(b), (d) and
270.6c-10(b) shall be shown as a negative amount and deducted from
current Sec. Sec.  270.12b-2(b), (d) and 270.6c-10(b) expenses. If
Sec. Sec.  270.12b-2(b) and 270.6c-10(b) expense reimbursements exceed
current Sec. Sec.  270.12b-2(b) and 270.6c-10(b) expenses, such excess
shall be used in the calculation of total expenses under this caption.
* * * * *

PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933

    4. The authority citation for Part 239 continues to read, in part,
as follows:

    Authority:  15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3,
77sss, 78c, 78l, 78m, 78n, 78o(d), 78u-5, 78w(a), 78ll, 78mm, 80a-
2(a), 80a-3, 80a-8, 80a-9, 80a-10, 80a-13, 80a-24, 80a-26, 80a-29,
80a-30, and 80a-37, unless otherwise noted.
* * * * *

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934

    5. The general authority citation for Part 240 is revised to read
as follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i,
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5,
78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4,
80b-11, and 7201 et seq.; and 18 U.S.C. 1350, unless otherwise
noted.

    6. Section 240.10b-10 is amended by:
    a. Revising paragraph (a)(6)(i);
    b. Removing from paragraph (a)(9)(ii) the period at the end of the
paragraph and adding in its place ``; and''
    c. Adding paragraphs (a)(10) and (a)(11);
    d. Revising paragraph (b)(2);
    e. Adding paragraph (d)(10);
    f. Removing from paragraph (e) introductory text ``, Provided
that:'' at the end and adding in its place ``; provided that the broker
or dealer that effects any transaction for a customer in security
futures products in a futures account gives or sends to the customer no
later than the next business day after execution of any futures
securities product transaction, written notification disclosing:''
    g. Removing paragraph (e)(1) introductory text and redesignating
paragraphs (e)(1)(i), (ii), (iii) and (iv) as paragraphs (e)(1), (2),
(3), and (4), respectively; and
    h. Removing paragraph (e)(2).
    The revisions and additions read as follows.

Sec.  240.10b-10  Confirmation of transactions.

* * * * *
    (a) * * *
    (6) * * *
    (i) The yield at which the transaction was effected, including the
percentage

amount and its characterization (e.g., current yield, yield to
maturity, or yield to call) and if effected at yield to call, the type
of call, the call date and, if different, the first date upon which the
security may be called, and call price; and
* * * * *
    (10) In the case of a purchase of a mutual fund security:
    (i) The amount of any sales charge that the customer incurred at
the time of purchase, expressed in dollars and as a percentage of the
public offering price, the net dollar amount invested in the security,
and the amount of any applicable breakpoint or similar threshold used
to calculate the sales charge;
    (ii) The maximum amount of any deferred sales charge that the
customer may incur in connection with the subsequent redemption or sale
of the securities purchased, expressed as a percentage of the net asset
value at the time of purchase or at the time of redemption or sale, as
applicable;
    (iii) If the customer will incur any ongoing sales charge (as
defined in Sec.  270.6c-10) or any marketing and service fee (as
defined in Sec.  270.12b-2) after the time of purchase:
    (A) The annual amount of the charge or fee, expressed as a
percentage of net asset value; the aggregate amount of the ongoing
sales charge that may be incurred over time, expressed as a percentage
of net asset value; and the maximum number of months or years that the
customer will incur ongoing sales charge; and
    (B) The following statement (which may be revised to reflect the
particular charge or fee at issue): ``In addition to ongoing sales
charges and marketing and service fees, you will also incur additional
fees and expenses in connection with owning this mutual fund, as set
forth in the fee table in the mutual fund prospectus; these typically
will include management fees and other expenses. Such fees and expenses
are generally paid from the assets of the mutual fund in which you are
investing. Therefore, these costs are indirectly paid by you.''; and
    (11) In the case of a redemption or sale of a mutual fund security,
the amount of any deferred sales charge that the customer has paid in
connection with the redemption or sale, expressed in dollars and as a
percentage of the net asset value at the time of purchase or at the
time of redemption or sale, as applicable.
    (b) * * *
    (2) Such broker or dealer gives or sends to such customer within
five business days after the end of each quarterly period, for
transactions involving investment company and periodic plans, and after
the end of each monthly period, for other transactions described in
paragraph (b)(1) of this section, a written statement disclosing each
purchase or redemption, effected for or with, and each dividend or
distribution credited to or reinvested for, the account of such
customer during the month; the date of such transaction; the identity,
number, and price of any securities purchased or redeemed by such
customer in each such transaction; the total number of shares of such
securities in such customer's account; any remuneration received or to
be received by the broker or dealer in connection therewith; any
ongoing sales charges or marketing and service fees incurred in
connection with the purchase or redemption of a mutual fund security;
and that any other information required by paragraph (a) of this
section will be furnished upon written request: Provided, however, that
the written statement may be delivered to some other person designated
by the customer for distribution to the customer; and
* * * * *
    (d) * * *
    (10) Mutual fund security means any security issued by an open-end
company, as defined by section 5(a)(1) of the Investment Company Act of
1940 (15 U.S.C. 80a-5(a)(1)), that is registered or required to
register under section 8 of that Act, including any series of such
company.
* * * * *
    7. Schedule 14A (referenced in Sec.  240.14a-101) is amended by
revising paragraphs (a)(1)(iii) and (d) in Item 22 to read as follows:

Sec.  240.14a-101  Schedule 14A Information required in a proxy
statement.

* * * * *

Item 22. Information Required in Investment Company Proxy Statement

    (a) * * *
    (1) * * *
    (iii) Marketing and Service Fee. The term ``Marketing and Service
Fee'' shall mean a fee deducted from Fund assets to finance
distribution activities pursuant to rule 12b-2(b) (Sec.  270.12b-2(b)).
* * * * *
    (d) Marketing and Service Fees. If action is to be taken to
institute a Marketing and Service Fee or increase the rate of an
existing Marketing and Service Fee, include the following information
in the proxy statement:
    (1) A description of the nature of the action to be taken and the
reasons therefore, the rate of the Marketing and Service Fee as it is
proposed to be deducted and the purposes for which such fee may be
used, and, if the action to be taken is an increase in the rate of an
existing Marketing and Service Fee, the reasons for the increase.
    (2) If the Fund currently deducts a Marketing and Service Fee:
    (i) Provide the date that the Marketing and Service Fee was first
instituted and the date of the last increase, if any;
    (ii) Disclose the rate of the Marketing and Service Fee and the
purposes for which such fee may be used; and
    (iii) Disclose the name of, and the amount of any Marketing and
Service Fee paid by the Fund during its most recent fiscal year to, any
person who is an affiliated person of the Fund, its investment adviser,
principal underwriter, or Administrator, an affiliated person of such
person, or a person that during the most recent fiscal year received
10% or more of the aggregate amount of Marketing and Service Fees paid
by the Fund.
* * * * *

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

    8. The authority citation for Part 249 continues to read, in part,
as follows:

    Authority:  15 U.S.C. 78a et seq. and 7201 et seq.; and 18
U.S.C. 1350, unless otherwise noted.
* * * * *

PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940

    9. The general authority citation for Part 270 continues to read in
part as follows:

    Authority:  15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, and 80a-
39, unless otherwise noted.

    10. The authority citation for Sec.  270.6c-10 is revised to read
as follows:

    Authority: * * *

    Section 270.6c-10 is also issued under 15 U.S.C. 80a-6(c), 15
U.S.C. 80a-12(b), 15 U.S.C. 80a-22(d) and 80a-37(a).
* * * * *
    11. The authority citation for Sec.  270.12b-2 is added to read as
follows:

    Authority: * * *
* * * * *
    Section 270.12b-2 is also issued under 15 U.S.C. 80a-6(c), 15
U.S.C. 80a-12(b), and 80a-37(a).
* * * * *
    12. The authority citation for Sec.  270.17a-8 continues to read as
follows:

    Authority: * * *
* * * * *
    Section 270.17a-8 is also issued under 15 U.S.C. 80a-6(c) and
80a-37(a).
* * * * *
    13. Section 270.6c-10 is revised to read as follows:

Sec.  270.6c-10  Exemptions for certain open-end management investment
companies to impose deferred sales loads and other sales charges.

    (a) Deferred Sales Load. (1) Exemption. Notwithstanding sections
2(a)(32), 2(a)(35), and 22(d) of the Act [15 U.S.C. 80a-2(a)(32), 80a-
2(a)(35), and 80a-22(d), respectively] and Sec.  270.22c-1, a fund,
other than a registered separate account, and any exempted person may
impose a deferred sales load on fund shares, if:
    (i) The amount of the deferred sales load does not exceed a
specified percentage of the net asset value or the offering price at
the time of purchase; and
    (ii) The terms of the deferred sales load are covered by the
provisions of Rule 2830 of the Conduct Rules of the NASD; and
    (iii) The same deferred sales load is imposed on all shareholders,
except that a fund may offer scheduled variations in or elimination of
a deferred sales load to a particular class of shareholders or
transactions if the fund has satisfied the conditions in Sec.  270.22d-
1.
    (2) Load Reductions. Nothing in this paragraph (a) prevents a fund
from offering to existing shareholders a new scheduled variation that
would waive or reduce the amount of a deferred sales load not yet paid.
    (b) Fund-Level Sales Charge. (1) Exemption. Notwithstanding Sec.
270.12b-2(b)(1), a fund may deduct an ongoing sales charge from fund
assets if the cumulative ongoing sales charges imposed on a purchase of
fund shares do not exceed the shareholder's maximum sales load,
provided that:
    (i) A fund may satisfy the requirements of this paragraph (b) if
shares subject to an ongoing sales charge convert (without any
shareholder action and in accordance with Sec.  270.18f-3(f)(2)) to a
fund share class without an ongoing sales charge, on or before the end
of the conversion period;
    (ii) Shares acquired by reinvestment of dividends or other
distributions may be invested in a fund share class with an ongoing
sales charge only if the reinvested shares convert to a share class
without an ongoing sales charge no later than when the shares on which
the dividend or distribution was declared convert;
    (iii) A fund may offer scheduled variations in the conversion
period to a particular class of shareholders or transactions if the
fund has satisfied the conditions in Sec.  270.22d-1; and
    (iv) The fund does not acquire shares of another fund that, with
respect to the class of shares acquired, deducts an ongoing sales
charge.
    (2) Sales Charge Reductions. Nothing in this paragraph (b) prevents
a fund from offering to existing shareholders a new scheduled variation
that would reduce the conversion period.
    (3) Changes to Ongoing Sales Charge. No fund may:
    (i) Institute or increase the rate of an ongoing sales charge
applied to a fund share class or series after any public offering of
the fund's voting shares or the sale of such shares to persons who are
not organizers of the fund; or
    (ii) Increase the amount of time after which a share class will
automatically convert to a class of shares that does not have an
ongoing sales charge, if it would increase the cumulative amount of
ongoing sales charges imposed.
    (c) Account-Level Sales Charge. Notwithstanding section 22(d) of
the Act [15 U.S.C. 80a-22(d)], any fund class and any exempted person
may offer or sell fund shares at a price other than the current public
offering price described in the prospectus, if:
    (1) The class does not impose an ongoing sales charge pursuant to
Sec.  270.6c-10(b), although it may impose a marketing and service fee
pursuant to Sec.  270.12b-2(b); and
    (2) The fund discloses in its registration statement that it has
elected to rely on this paragraph (c) for an exemption from section
22(d) of the Act [15 U.S.C. 80a-22(d)].
    (d) Definitions. For purposes of this section:
    (1) Acquired security has the same meaning as in Sec.  270.11a-
3(a)(1).
    (2) Conversion period is the period beginning on the day that
shares are purchased and ending on the last day of the calendar month
during which the cumulative ongoing sales charge rates exceed the
shareholder's maximum sales load rate. The maximum number of months in
a conversion period is determined by dividing the shareholder's maximum
sales load rate by the ongoing sales charge rate and multiplying the
result by 12.
    (3) Deferred sales load means any amount properly chargeable to
sales or promotional expenses that is paid directly by a shareholder to
a fund after purchase but before or upon redemption.
    (4) Distribution activity means any ``Distribution activity,'' as
defined in Sec.  270.12b-2(e)(2).
    (5) Exchanged security has the same meaning as in Sec.  270.11a-
3(a)(4).
    (6) Exempted person means any principal underwriter of, dealer in,
and any other person authorized to effect transactions in, shares of a
fund.
    (7) Fund means a registered open-end management investment company,
and includes a separate series of a fund.
    (8) Group of investment companies has the same meaning as in Sec.
270.11a-3(a)(5).
    (9) Maximum sales load means the maximum sales load rate multiplied
by the total dollar amount paid.
    (10) Maximum sales load rate means the reference load minus the sum
of the rates of:
    (i) Any sales load (including a deferred sales load) incurred in
connection with the purchase of fund shares; and
    (ii) Any sales loads or ongoing sales charges previously paid with
respect to an exchanged security within the same group of investment
companies.
    (11) Ongoing sales charge means any charges or fees deducted from
fund assets to finance distribution activity in excess of the maximum
rate permitted under Sec.  270.12b-2(b). In the case of a fund (``the
acquiring fund'') that acquires shares of another fund (the ``acquired
fund''), ongoing sales charge means any charges or fees deducted from
fund assets to finance distribution activity in excess of the acquiring
fund's marketing and service fee (as defined in Sec.  270.12b-2(e)(3)),
without regard to any acquired fund's marketing and service fee.
    (12) Ongoing sales charge rate is the annual ongoing sales charge,
expressed as a percentage of net asset value.
    (13) Organizers of a fund means any affiliated person of the fund,
any affiliated person of such person, any promoter of the fund, and any
affiliated person of such promoter.
    (14) Reference load means:
    (i) The highest sales load rate that the shareholder would have
paid if, at the time of the purchase of fund shares, the shareholder