Mail Vote—NASD Solicits Member Vote on Proposed Amendment Exempting Money Market Mutual Funds From Disclosure Requirements;

Last Voting Date: January 31, 1994

Executive Summary

The NASD invites members to vote on a revised proposed amendment to Article III, Section 26(d)(4) of the Rules of Fair Practice to exempt money market mutual funds with asset-based sales charges equal to or less than .25 of 1% of net assets (or 25 basis points) from the required disclosure under that subsection that "long-term shareholders may pay more than the economic equivalent of the maximum front-end sales charge permitted by this section." The last voting date is January 31, 1994. The text of the proposed amendment follows this Notice.

Background

On July 7, 1993, new rules governing investment company sales charges took effect under Article III, Section 26(d) of the Rules of Fair Practice. The NASD has received several applications for exemption from Subsection 26(d)(4), which requires that the prospectus for an investment company with an asset-based sales charge must disclose that "longterm shareholders may pay more than the economic equivalent of the maximum front-end sales charges permitted by this section." The applications noted that the rule language is specific and requires the disclosure, even if the statement may not be true for a particular mutual fund.

The applicants pointed out that in the case of a money market mutual fund, there is a high probability that the statement will be inaccurate because such funds generally have very low asset-based sales charges and an investor would have to be a shareholder for an extremely long time before the disclosure would be true. According to one applicant, a shareholder of its fund would have to remain in the fund for more than 55 years before exceeding the maximum front-end charge. The applicants suggest that since money market mutual funds are traditionally short-term investments or cash management vehicles, it is unlikely that investors will stay in such funds for lengthy periods. As a result, they believe that the disclosure may be misleading, or at least confusing, to investors in money market mutual funds.

The NASD published the proposed rule change for member vote in (September 1993). After publication of the proposal for vote, the Securities and Exchange Commission (SEC) notified the NASD that it objected to the rule change as proposed because for certain money market funds with high asset-based sales charges (50 basis points or more) the disclosure statement would be accurate. For example, a fund with an asset-based sales charge of 50 basis points and a 3 percent return on investment would reach the economic equivalent of the maximum front-end sales charge permitted by Subsection 26(d) in approximately 14 years. Accordingly, the NASD is proposing to amend the proposed rule change to limit the exemption to money market mutual funds with asset-based sales charges of 25 basis points or less. Because this amendment to the proposed rule change represents a material change to the original proposal, the NASD is asking that members vote on the amended proposed rule change.

Request for Vote

The Board of Governors agrees with the arguments of the applicants and the comments of the SEC. Accordingly, it has determined to recommend amending Subsection 26(d)(4) to exempt money market mutual funds with asset-based sales charges of 25 basis points or less from the disclosure requirement. The Board does not believe that requiring funds to include disclosure statements in such circumstances serves any identifiable purpose nor does it advance any recognizable regulatory interest.

The Board considers the proposed amendment necessary and appropriate and recommends that members vote their approval. The text of the proposed new rule that requires member vote is below. Please mark the attached ballot according to your convictions and mail it in the enclosed, stamped envelope to the Corporation Trust Company. Ballots must be postmarked no later than January 31, 1994. The amendment would not take effect until it is filed with and approved by the SEC.

Questions regarding this Notice may be directed to R. Clark Hooper, Vice President, Investment Companies Regulation Department, (202) 728-8329, or Elliott R. Curzon, Senior Attorney, Office of General Counsel, (202) 728-8451.

Text of Proposed Amendment to Article III, Section 26 of the Rules Of Fair Practice

(Note: New language is underlined.)

Investment Companies

Sec. 26

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