SEC Approves Sales-Charge Disclosure Exemption For Money Market Mutual Funds
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Executive Summary
On February 24, 1994, the Securities and Exchange Commission (SEC) approved an amendment to Article III, Section 26(d)(4) of the Rules of Fair Practice exempting money market mutual funds with asset-based sales charges equal to or less than 25 basis points from disclosing that "long-term shareholders may pay more than the economic equivalent of the maximum front-end sales charge" permitted under Section 26. The amendment takes effect immediately.
Background
On July 7, 1993, new rules codified in Article III, Section 26(d) of the Rules of Fair Practice took effect governing investment company sales charges. About that time, the NASD received several applications for exemptions from Section 26(d)(4), which requires that the prospectus for an investment company with an asset-based sales charge must disclose that "long-term shareholders may pay more than the economic equivalent of the maximum front-end sales charges permitted by this section." The applicants 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, which has an asset-based charge of 15 basis points, would have to remain in the fund for more than 55 years before he would pay more than the maximum permitted front-end charge. The applicants suggested 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 were of the view that the disclosure may be misleading, or at least confusing, to investors in money market mutual funds.
Description Of The Amendment
The NASD agreed with the applicants and has amended Section 26(d)(4) to exempt money market mutual funds from the disclosure requirement. The SEC approved the amendment on February 24, 1994. The NASD also determined, however, that for certain money market funds with higher asset-based sales charges 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 limiting the exemption to money market mutual funds with asset-based sales charges equal to or less than .25 of one percent (25 basis points) of average net assets per annum.
In addition, in response to the SEC's request for comments on the amendment, one commenter asked that the exemption be expanded to include non-money market mutual funds with low asset-based sales charges or a class of shares with an asset-based sales charge that automatically converts to a class without such a charge after a fixed period of time. The commenter also asked that the amendment give mutual funds more flexibility to determine if the disclosure is appropriate for their particular fund.
The NASD determined that the changes requested by the commenter would not be consistent with the original intent of the disclosure provision in Section 26(d)(4), nor with the intent of the money market mutual fund exemption announced here. The intent of the amendment is to permit money market mutual funds, which generally have low asset-based sales charges, to avoid the required disclosure that "long-term shareholders may pay more than the economic equivalent of the maximum front-end sales charges permitted by this section." If the amendment were expanded to include non-money market funds, even if the return on investment of such a fund was currently low, the exemption would be available to funds, which could dramatically change their return on investment and thus significantly shorten the time to reach the maximum front-end load.
The amendment takes effect immediately. 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 Amendment To Article III, Section 26(d)(4) Of The Rules Of Fair Practice
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(Note: New language is underlined.)
Investment Companies Sec. 26