Point of Sale Disclosure Requirements and Confirmation Requirements for Transactions in Mutual Funds, College Savings Plans, and Certain Other Securities, and Amendments to the Registration Form for Mutual Funds, 10521-10557 [05-4215]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 70, Number 42 (Friday, March 4, 2005)]
[Proposed Rules]
[Pages 10521-10557]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-4215]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 239, 240 and 274

[Release Nos. 33-8544; 34-51274; IC-26778; File No. S7-06-04]
RIN 3235-AJ11; 3235-AJ12; 3235-AJ13; 3235-AJ14


Point of Sale Disclosure Requirements and Confirmation 
Requirements for Transactions in Mutual Funds, College Savings Plans, 
and Certain Other Securities, and Amendments to the Registration Form 
for Mutual Funds

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule; reopening of comment period and supplemental 
request for comment.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
reopening the comment period on proposed rules, published in January 
2004, that would require broker-dealers to provide their customers with 
information regarding the costs and conflicts of interest that arise 
from the distribution of mutual fund shares, 529 college savings plan 
interests, and variable insurance products. The Commission also is 
supplementing its request for comments on the proposed rules to reflect 
issues raised by commenters, including feedback received from investors 
in in-depth interviews about revised forms for disclosing information 
at the point of sale. The Commission is publishing this supplemental 
request for comment and reopening the comment period to assure that the 
public has a full opportunity to address such issues in their comments.

DATES: Comments should be submitted on or before April 4, 2005.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (https://
www.sec.gov/rules/proposed.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number S7-06-04 on the subject line; or

[[Page 10522]]

     Use the Federal eRulemaking Portal (https://
www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, 
Washington, DC 20549-0609. All submissions should refer to File Number 
S7-06-04. This file number should be included on the subject line if e-
mail is used. To help us process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (https://www.sec.gov/
rules/proposed.shtml). Comments also are available for public 
inspection and copying in the Commission's Public Reference Room, 450 
Fifth Street, NW, Washington, DC 20549. All comments received will be 
posted without change; we do not edit personal identifying information 
from submissions. You should submit only information that you wish to 
make available publicly.

FOR FURTHER INFORMATION CONTACT: With respect to Securities Exchange 
Act Rules 10b-10, 15c2-2, and 15c2-3, contact Catherine McGuire, Chief 
Counsel, Paula R. Jenson, Deputy Chief Counsel, Joshua S. Kans, Branch 
Chief, David W. Blass, Branch Chief, or John J. Fahey, Attorney, at 
(202) 942-0073, Office of Chief Counsel, Division of Market Regulation, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-1001.
    With respect to Form N-1A, contact Deborah Skeens, Senior Counsel, 
at (202) 942-0721, Office of Disclosure Regulation, Division of 
Investment Management, Securities and Exchange Commission, 450 Fifth 
Street, NW, Washington, DC 20549-0506.

SUPPLEMENTARY INFORMATION:

I. Introduction

    On January 29, 2004, the Commission issued, and requested comment 
on, two proposed new rules, as well as rule amendments under the 
Securities Exchange Act of 1934 designed to enhance the information 
broker-dealers provide to their customers in connection with 
transactions in certain types of securities.\1\ Proposed rules 15c2-2 
and 15c2-3 would require broker-dealers to provide their customers with 
targeted information, at the point of sale and in transaction 
confirmations, regarding the costs and conflicts of interest that arise 
from the distribution of mutual fund shares, 529 college savings plan 
interests \2\, and variable insurance products (collectively, ``covered 
securities''). The Commission also proposed conforming amendments to 
rule 10b-10, its general confirmation rule, as well as amendments to 
that rule to provide investors with additional information about call 
features of debt securities and preferred stock. Finally, the 
Commission proposed amendments to Form N-1A, the registration form for 
mutual funds, to improve disclosure of sales loads and revenue sharing 
payments.\3\
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    \1\ See Securities Exchange Act Release No. 49148 (January 29, 
2004), 69 FR 6438 (February 10, 2004) (``Proposing Release'').
    \2\ College savings plans are often referred to as ``529 savings 
plans.''
    \3\ In the Proposing Release, and on the forms attached to the 
Proposing Release, we used the term ``revenue sharing'' to refer to 
payments to broker-dealers for promoting certain covered securities 
over others. However, investor feedback indicated that the term 
``revenue sharing'' is not easily understandable. While we continue 
to refer to the term ``revenue sharing payment'' in this release, we 
have removed references to ``revenue sharing'' from the forms 
attached to this release and instead refer to payments broker-
dealers receive for promoting certain covered securities over 
others. See infra part II.A.3.
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    We received over one thousand separate comments on the proposed 
rules and rule amendments, as well as over four thousand comments from 
individuals and entities using a variety of standard letter types.\4\ 
Because proposed rules 15c2-2 and 15c2-3 were intended to provide clear 
and useful disclosure to investors, we actively encouraged comments 
from individual investors and investor groups. We also met with 
numerous investor groups, and engaged a consultant to assist in 
investor testing of possible forms for confirmation and point of sale 
disclosures.
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    \4\ The full text of comments to the proposal, including the 
text of standard letter types, is publicly available at: https://
www.sec.gov/rules/proposed/s70604.shtml.
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    The comments and other feedback we received suggest a number of 
areas where the proposed point of sale and confirmation disclosure 
requirements may need to be revised to more effectively communicate 
information to investors, while more efficiently balancing the benefits 
of disclosure against the costs of compliance. In addition, some 
feedback suggests that we should consider taking a more layered 
approach to disclosure by requiring broker-dealers to use the Internet 
as a disclosure medium to supplement point of sale and confirmation 
disclosure.
    Section II of this release discusses possible improvements to the 
proposed point of sale disclosure rule for transactions in covered 
securities. Section III discusses possible improvements to the proposed 
confirmation disclosure rule for transactions in covered securities. 
Section IV discusses the possible requirement for broker-dealers to 
disclose detailed information about revenue sharing payments and other 
broker compensation practices on the Internet. Section V discusses 
possible changes to the prospectus disclosure of revenue sharing. 
Section VI contains a general request for comments on this release and 
also renews our request for comments on the proposals in the Proposing 
Release.\5\
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    \5\ In the Proposing Release, we proposed rule language to 
require confirmation disclosure of comparative information about 
certain costs and conflicts. This release does not address those 
proposed requirements, given that the content of comparison 
information and the form of disclosure (e.g., at the point of sale 
versus in confirmations) in large part will depend upon any final 
point of sale and confirmation requirements. At a later date and in 
a separate release, we plan to request further comments about 
comparison range disclosure requirements.
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II. Point of Sale Proposal

    Proposed rule 15c2-3 was intended to improve investment 
decisionmaking by providing investors at the point of sale with 
information about costs and conflicts of interest associated with 
purchases of covered securities. Comments and investor feedback 
indicated, however, that while point of sale disclosure may be quite 
useful to investors, there are a number of areas that could be enhanced 
to make the proposed rule more effective. These include: (a) The 
content and format of the disclosure that would be required under the 
proposed rule, including the disclosure of ``management fees'' and 
``other expenses'' of the covered security; (b) the manner in which 
oral point of sale disclosures would be made; (c) the timing of 
delivery of point of sale disclosures; (d) exceptions to the 
requirement to deliver point of sale disclosures; and (e) special 
issues related to variable insurance products. We seek additional 
comment about these key areas, as detailed below.

A. Content and Format of Proposed Point of Sale Disclosure for Covered 
Securities

1. Brief Summary of Select Comments to the Proposing Release Relating 
to Point of Sale Disclosure
    We received substantial feedback on the point of sale forms that 
would be required under proposed rule 15c2-3. Some investors were 
confused by the use of industry jargon, such as ``sales loads'' and 
``revenue sharing,'' in the forms attached to the Proposing Release.

[[Page 10523]]

Some stated that the definitions and explanatory materials were not as 
useful as they would have liked. Others stated that the forms did not 
adequately differentiate one-time costs from ongoing costs.\6\ Also, 
many investors wanted point of sale disclosure to provide comprehensive 
information about all the costs of owning covered securities, not just 
distribution-related costs. They sought comprehensive information about 
ownership costs, in percentage terms and in dollar terms, to better 
inform them about the total costs associated with purchasing and owning 
these securities.\7\
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    \6\ AARP conducted its own investor testing, which further 
indicated that the proposed disclosure form was not effective in 
communicating information to many investors.
    \7\ While many investors recognized that dollar-based disclosure 
of future annual costs is hypothetical in nature, in that these 
costs would vary over time, they nonetheless concluded that such 
dollar-based disclosure would help them make better investment 
decisions. Consumer advocates also supported this change, stating 
that point of sale disclosure that failed to include information 
about fund management fees and other non-distribution costs could 
cause some investors to mistakenly believe that those additional 
costs of ownership are not present.
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    Some securities industry commenters urged the Commission to revisit 
the proposed requirement that point of sale disclosure be specific to 
the anticipated amount of the customer's transaction, stating that such 
quantified disclosure would be difficult and costly to provide. Some 
saw standardized point of sale disclosure as preferable to transaction-
specific disclosure and some viewed point of sale disclosure as overly 
time-consuming for broker-dealers to deliver, particularly over the 
telephone.
    Some commenters suggested specific changes to the wording and 
layout of the proposed point of sale forms, and provided alternative 
forms for us to consider.\8\ In addition, we received several comments 
about the proposed ``yes or no'' point of sale disclosure of whether a 
broker-dealer or its affiliates receive revenue sharing from a person 
within a fund complex. The disclosure requirement, including proposed 
definitions of ``revenue sharing'' and ``fund complex,'' in general 
would have required a broker-dealer to disclose whether it receives 
certain payments from affiliates of the issuer of the covered security, 
but not from the issuer itself. Disclosure about special compensation 
arrangements was intended to alert customers to those conflicts of 
interest and promote further inquiry.
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    \8\ See Letter from Mary L. Shapiro, Vice Chairman, NASD, and 
President, Regulatory Policy and Oversight, NASD, to Jonathan G. 
Katz, Secretary, Commission, dated May 4, 2004; Letter from Mary L. 
Shapiro, Vice Chairman, NASD, and President, Regulatory Policy and 
Oversight, NASD, to Jonathan G. Katz, Secretary, Commission, dated 
August 20, 2004; Letter from Mike Scafati, Senior Vice President, 
A.G. Edwards & Sons, Inc., dated April 12, 2004; Letter from William 
Lutz, Professor of English, Rutgers University, to Jonathan G. Katz, 
Secretary, Commission, dated April 12, 2004; Letter from Nancy M. 
Smith to Jonathan G. Katz, Secretary, Commission, dated April 12, 
2004; Letter from Nancy M. Smith to Jonathan G. Katz, Secretary, 
Commission, dated April 22, 2004; Letter from Amy B.R. Lancellotta, 
Acting General Counsel, Investment Company Institute, to Jonathan G. 
Katz, Secretary, Commission, dated April 12, 2004; Memorandum from 
the Division of Market Regulation regarding a meeting with 
representatives of the Investment Company Institute, dated October 
26, 2004; and Memorandum from the Division of Market Regulation 
regarding a meeting with representatives of the Securities Industry 
Association, dated October 26, 2004.
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    One commenter suggested that the disclosure requirement relating to 
revenue sharing should be more focused, stating that the proposal would 
encompass payments unrelated to the distribution of covered securities 
purchased by a customer.\9\ Commenters also expressed concern that the 
provisions of the proposed rules relating to revenue sharing would lead 
to inconsistent disclosure depending upon how payments are depicted by 
a fund complex, particularly in light of the proposed exclusion for 
payments by issuers.\10\ Some commenters also suggested that such 
payments merely constitute ``cost sharing'' by which fund families 
compensate broker-dealers for services that the fund families otherwise 
would incur.\11\
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    \9\ Some commenters also stated that the proposed disclosure 
requirement should not encompass payments that a broker-dealer 
receives for underwriting state bonds, or payments received by banks 
that are affiliated with broker-dealers, or certain payments that 
broker-dealers receive from affiliated fund complexes.
    \10\ That particularly may be an issue with regard to payments 
received by fund ``supermarkets'' operated by certain broker-
dealers.
    \11\ Regardless of the characterization, a broker-dealer's 
receipt of special payments from some fund complexes but not others 
gives the broker-dealer monetary incentives to promote the sale of 
securities of the fund complexes that make those payments. That is 
true even if the payments solely reimburse the broker-dealer for 
sales and servicing costs it incurs.
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2. Revised Point of Sale Disclosure Forms
    In response to the comments we received to the Proposing Release, 
we sought feedback from investors and have developed revised forms that 
we are considering adopting.\12\ Broker-dealers would be required to 
deliver these proposed new forms at the point of sale before a customer 
purchases a covered security. Consistent with investors' views that 
disclosure should be targeted and should exclude irrelevant 
information, broker-dealers would not use a ``one size fits all'' form 
to provide written point of sale disclosure to customers. Instead, 
while broker-dealers would have to disclose specific categories of 
information in a required format to the extent those categories are 
applicable, the written point of sale forms would omit categories of 
information that are not applicable to a particular purchase.\13\ This 
targeted approach would limit ``information overload''--which can 
undercut the effectiveness of highly detailed disclosure--and also 
would facilitate disclosure of special costs associated with particular 
securities.\14\ It therefore should lead to disclosure that is as 
standardized as possible, while targeted enough to be useful to a wide 
range of investors. We would hope that investors would request, and 
broker-dealers would provide, forms for different share classes where 
applicable and where consistent with suitability obligations, in order 
to help investors make informed investment decisions.
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    \12\ The Commission retained Siegel & Gale, LLC and Gelb 
Consulting Group, Inc. to help develop and test model disclosure 
forms that would effectively convey information to investors. See 
Siegel & Gale, LLC/Gelb Consulting Group, Inc., ``Results of In-
Depth Investor Interviews Regarding Proposed Mutual Fund Sales Fee 
and Conflict of Interest Disclosure Forms: Report to the Securities 
and Exchange Commission,'' (November 4, 2004) and ``Supplemental 
Report to the Securities and Exchange Commission'' (November 29, 
2004) (together, the ``Siegel & Gale/Gelb Consulting Report''). The 
report is available at https://www.sec.gov/rules/proposed/s70604/
rep110404.pdf and the supplemental report is available at https://
www.sec.gov/rules/proposed/s70604/sup-rep010705.pdf.
    \13\ Thus, for example, a customer contemplating buying class A 
mutual fund shares with an upfront sales fee would receive a form 
that would reflect that upfront fee in a standardized format, but a 
broker-dealer would not be required to include information about 
deferred sales fees, which are not applicable to class A shares.
    \14\ As discussed below, those special costs may include, among 
others, account opening fees imposed by the issuers of college 
savings plans, or purchase or redemption fees imposed by funds.
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    Consistent with those principles, the forms in Attachments 1-6 
reflect feedback we have received through investor outreach about how 
to improve the clarity and readability of the forms, as well as 
additional analysis about how to improve their cost-effectiveness.\15\ 
Attachments 1-3 show proposed new ``models'' of required point of sale 
disclosure forms filled in for a hypothetical mutual fund,\16\ with the

[[Page 10524]]

differences among the forms reflecting differences in share classes and 
other pricing attributes. Attachments 4-6 show proposed new ``models'' 
for the required point of sale disclosure forms filled in for a 
hypothetical 529 savings plan, again reflecting differences in pricing. 
Following is a summary of some of the key aspects of these forms:
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    \15\ This section discusses generally the proposed new point of 
sale disclosure forms for all covered securities. We recognize, 
however, that variable insurance products have special disclosure 
issues. We discuss additional forms more appropriate to those 
products in part II.E.
    \16\ The proposed new ``model'' forms in Attachments 1-3 and 4-6 
depict how the required forms would be filled in for hypothetical 
mutual funds or 529 savings plans, respectively.
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    a. Clarity of the forms. We believe that the forms in Attachments 
1-6 are clearer and easier to understand than the point of sale forms 
attached to the Proposing Release. Where possible, we have used plain 
English in the forms, rather than using industry jargon. In addition, 
broker-dealers would be required to deliver forms in the same format, 
including font size and layout, as that of Attachments 1-6.
    b. Identification of security subject to disclosure. Broker-dealers 
would be required to more clearly identify the security subject to 
disclosure in the forms. For example, in the case of mutual funds, this 
would include the disclosure of the fund's ticker symbol (if 
applicable). In the case of 529 savings plans, this would include 
disclosure of the specific age-based or other portfolio within the 
plan, if applicable, and the name of the state that sponsors the plan, 
if that name otherwise would not be identified. Disclosure of point of 
sale information for 529 savings plan interests also would include 
brief text reminding customers to consider the potential tax benefits 
of investing in the plan of their home state.
    c. Combined use of standardized and transaction-specific cost 
disclosure. Costs associated with investments in covered securities 
would be shown using standardized $1,000, $50,000 and $100,000 payment 
or investment amounts. In addition, if a customer requests at the point 
of sale, broker-dealers would be required to use ``fill in the blank'' 
boxes to disclose cost information reflecting the customer's 
anticipated payment amount.\17\
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    \17\ There are potential disclosure efficiencies associated with 
standardized disclosure, such as the use of preprinted forms. At the 
same time, however, our testing has shown that many investors want 
information at the point of sale that is specific to the anticipated 
amount of their purchase. The proposed new forms are intended to 
strike a balance between the use of standardized disclosure and the 
ability for interested investors to receive more personalized 
information.
    In developing these new proposed forms, we considered disclosing 
information based on a $10,000 hypothetical investment. However, our 
investor testing indicated that disclosure based on a $1,000 
hypothetical investment should permit customers to more easily 
estimate the costs for their actual purchase amount than disclosures 
based on a $10,000 hypothetical investment. Furthermore, disclosure 
of information based on hypothetical $50,000 and $100,000 
investments provide additional context and also illustrate the 
effect of breakpoint discounts on upfront sales loads (referred to 
on the forms and in this release as ``sales fees'' for mutual 
funds).
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    d. Presentation of sales fee disclosure. Based on the standardized 
payment amounts (for securities with an upfront sales fee)\18\ or 
investment amounts (for other securities), broker-dealers would be 
required to disclose on the forms sales fees in dollars and as a 
percentage of the amount invested.\19\ For securities with an upfront 
sales fee, the forms would contain an additional column for the net 
amount invested. Broker-dealers would be required to disclose the back 
end sales fee on the form as a ``maximum'', reflecting the highest back 
end fee a customer could expect to pay if the investment did not 
appreciate or depreciate.\20\ Broker-dealers would also be required to 
disclose on the forms a brief statement about the possible availability 
of breakpoint discounts, referred to on the forms as ``volume 
discounts.''
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    \18\ Whenever an upfront sales fee is charged, the amount of the 
investment is less than what the customer pays.
    \19\ The ``investment amount'' could be defined to equal the 
customer's total payment less the upfront sales fee.
    \20\ The amount of any back end sales fee depends on the time an 
investor sells the covered security and the net asset value of the 
covered security at that time, the actual amount of the fee would 
not be known at the point of sale.
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    e. Comprehensive annual cost disclosure. In the Proposing Release, 
we proposed to require broker-dealers to disclose only distribution-
related costs. However, in response to the comments and investor 
testing described above, we now propose to require broker-dealers to 
disclose on the proposed new forms comprehensive information about all 
the costs of owning the securities subject to disclosure, including 
investment company costs such as ``management fees'' and ``other 
expenses'' that are disclosed in the prospectus. The disclosure of 
those costs would be made in both dollar terms and as a percentage of 
investment value. Because our investor testing showed that disclosure 
of costs appears to be most effective when all the components of the 
costs are identified, broker-dealers would be required to show the 
breakdown of annual costs by category. In addition, they would be 
required to disclose any flat annual fees, such as the account fee 
illustrated on Attachment 1.
    f. Disclosures tailored to share class and pricing structure. 
Broker-dealers would be required to tailor point of sale disclosures to 
reflect particular share classes or other pricing structures that are 
applicable to a contemplated purchase. Accordingly, point of sale 
disclosure would be required for all share classes and pricing 
structures, not just the front-end, back-end, and ``level load'' 
structures set forth in the attachments (commonly referred to as A, B, 
and C share classes). Broker-dealers selling any other share classes or 
pricing structures would be required to provide the applicable 
disclosures from the attached forms.
    g. Disclosure of all share classes under consideration. A broker-
dealer would have to provide point of sale information with regard to 
all share classes that are under consideration at the point of sale, 
including share classes other than the typical A, B, and C share 
classes.
    h. Disclosure of revenue sharing arrangements. Broker-dealers would 
be required to disclose the existence of revenue sharing payments they 
receive for promoting covered securities as a conflict of interest. 
Consistent with the proposed Internet disclosure requirements discussed 
below, broker-dealers would also be required to disclose on the point 
of sale forms an Internet Web site and a toll-free telephone number 
customers can use to find more detailed information about disclosures 
of those payments, including the amounts of, and sources of, the 
payments.\21\
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    \21\ Broker-dealers would not be required to include the amounts 
of revenue sharing payments on the point of sale disclosure forms, 
or on transaction confirmations. This differs from the proposed 
rules described in the Proposing Release. Some investors expressed 
more interest in information about the existence of the conflict of 
interest created by the revenue sharing payments than the amounts 
paid under revenue sharing arrangements. While descriptive 
information about the conflicts posed by revenue sharing 
arrangements is necessary to inform customers about the conflicts of 
interest facing their agents, as discussed below in part IV, 
Internet-based disclosure may be a preferable means for giving 
investors detailed and more thorough information about revenue 
sharing payments their broker-dealer receives and the conflicts of 
interest those payments create.
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    i. Disclosure of special incentives to broker-dealer sales 
personnel. Broker-dealers would be required to disclose the fact, if 
true, that they pay their personnel proportionately more for selling 
the covered security than for others (i.e., whether they pay 
differential compensation) or for selling certain share classes over 
others.\22\ The

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forms would inform investors of where to find out more detailed 
disclosures of broker compensation and the special incentives paid to 
sales personnel for selling certain funds over others.\23\
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    \22\ As proposed, point of sale disclosure of differential 
compensation practices would not cover situations in which an 
associated person has a financial incentive to sell securities that 
pay a relatively high dealer concession or commission to the broker-
dealer, even though that could translate into a relatively high 
payment to the associated person. That type of compensation 
incentive was not proposed to be captured at the point of sale due 
to the need to keep point of sale disclosure simple and the risk 
that such disclosure either would invariably lead to a ``yes'' 
answer or else would be too unwieldy at the point of sale. See 
Proposing Release n. 105.
    \23\ As with disclosure of revenue sharing payments, investors 
in general expressed more interest in information about costs they 
would pay than in information about how broker-dealers were 
compensated. Accordingly, the forms would not require disclosure of 
the standard dealer concession that broker-dealers receive to sell 
the covered security. As discussed below in part IV, Internet-based 
disclosure may be a preferable means for giving customers quantified 
information about how their brokers are being compensated.
    Because we prohibited the use of brokerage to promote 
distribution in September 2004, point of sale disclosure of 
information about portfolio brokerage commissions no longer would be 
necessary. See Investment Company Act Release No. 26591 (Sept. 2, 
2004), 69 FR 54728 (Sept. 9, 2004). The NASD has adopted a 
corresponding amendment to its rules governing broker-dealers, and 
NASD rules for several years have prohibited member broker-dealers 
from favoring or disfavoring any fund based on expected brokerage 
commissions. See Securities Exchange Act Release No. 50883 (Dec. 20, 
2004), 69 FR 77286 (Dec. 27, 2004).
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    j. Reference to the fund prospectus as the primary source of 
information about the fund. Broker-dealers would be required to include 
a statement that customers should consider all costs, goals and risks 
before purchasing a covered security, direct customers to the 
security's prospectus or official statement for more information, and 
inform customers that the broker-dealer can provide those documents, 
including the disclosure regarding special incentives.
    k. Permissive omission of categories where no information is 
applicable. Broker-dealers would be able to omit any categories of 
information that are not applicable. For example, if the disclosure on 
the forms about a conflicts of interest is ``NO,'' broker-dealers 
could, but are not required to, omit that disclosure.
3. Request for Additional Comments
    Would the proposed new point of sale disclosure forms outlined 
above and attached improve decisionmaking by providing investors with 
the right information about covered securities prior to purchasing 
those securities? Commenters are invited to discuss the effectiveness 
of the proposed point of sale disclosure forms in Attachments 1-6 and 
to suggest alternatives and modifications. Commenters specifically are 
invited to discuss:
    Q. Clarity of the forms. Do the proposed new forms in Attachments 
1-6 strike an appropriate balance between the use of plain English and 
the need for specific disclosure of information about the costs and 
conflicts associated with purchases of covered securities? Is the 
terminology used in the forms easily understandable? If not, how should 
it be modified? For example, should the disclosure of annual fees on 
the forms include the term ``12b-1 fee'' to refer to annual 
distribution and service fees paid to broker-dealers for selling a 
covered security? Should the disclosure of conflicts of interest on the 
forms include the term ``revenue sharing,'' so that investors may 
connect the information on the forms with information they receive 
through other disclosure documents or the media? Would the use of the 
terms ``12b-1 fee'' and ``revenue sharing'' be confusing? If so, what 
other terms are appropriate substitutes? Also, are there other terms 
that should be included on the forms?
     Is it appropriate for the Commission to mandate the format 
of the forms, including font size and layout? If the format of the 
forms is not mandated, is it likely, either intentionally or 
unintentionally, that broker-dealers would obscure the information 
being disclosed?
     Should the forms contain a ``date line'' where the broker-
dealer would be required to fill in the date when the point of sale 
disclosures were communicated to the investor? Would such a requirement 
aid in assuring compliance with the rule? For point of sale information 
delivered orally, should broker-dealers be required to notify the 
customer that the information is current as of the date of disclosure?
     Should the forms contain a ``signature line'' which 
customers would be required to sign to evidence receipt of the point of 
sale disclosures? Would such a requirement aid in assuring compliance 
with the rule? Could it cause broker-dealers to make point of sale 
disclosures later in the selling process in order to avoid having 
customers sign multiple disclosure forms? How would such a ``signature 
line'' requirement be implemented for oral point of sale disclosures?
    Q. Identification of security subject to disclosure. Do the 
attached proposed forms appropriately set forth the covered security's 
issuer and class or pricing structure, ticker symbol (if applicable), 
and other portfolio or fund designations as necessary to identify the 
security and differentiate it from the issuer's other securities?
     In a transaction involving a 529 savings plan interest or 
variable insurance product, point of sale disclosure would be required 
to encompass costs related to a number of underlying securities (such 
as 12b-1 fees imposed at the level of the underlying security), and 
conflicts related to underlying securities (such as revenue sharing 
paid for distribution of those securities). Should broker-dealers be 
required to inform investors that the information being disclosed 
reflects costs and conflicts arising from securities underlying the 
covered security that is being directly purchased, as well as the costs 
and conflicts directly applicable to the covered security? Should 
broker-dealers also be required to disclose the identity of the 
securities underlying the covered security that is being directly 
purchased? Are there certain circumstances where such disclosure should 
be required, such as when that information is not otherwise available?
     For interests in a 529 savings plan, should broker-dealers 
be required to identify a specific age-based portfolio or other 
portfolio within the plan, to the extent a specific portfolio has been 
identified at the point of sale? Alternatively, if the underlying 
portfolio has not been identified at the point of sale, should the 
broker-dealer be able to provide a disclosure document setting forth 
maximum costs (i.e., maximum sales fee and maximum annual ownership 
costs) associated with all portfolios underlying the plan? To what 
extent do investors purchase interests in 529 plans without already 
having identified the underlying portfolio for the investment? If the 
state sponsoring a plan is not otherwise identified, should the broker 
also be required to disclose the name of the state in order to help 
customers determine whether they may be entitled to state tax 
deductions or other benefits for investing in that state's plan?
     Some states offer state tax benefits for investments in 
the 529 savings plans they sponsor. If residents of those states invest 
in a different state's 529 savings plan, they generally would not be 
eligible to receive the state tax benefits. Attachments 4-6 include a 
brief text reminding customers to consider the potential tax benefits 
of investing in a plan sponsored by their home state. Is this 
disclosure appropriate? Should it be modified, narrowed, or expanded?
    Q. Combined use of standardized and transaction-specific cost 
disclosure. The proposed new forms would combine disclosure of 
standardized information with disclosure of transaction-specific 
information upon customer request, or in accordance with a broker-
dealer's standard practice. Does this approach appropriately balance 
the cost savings of standardized disclosure with the effectiveness of 
transaction-specific

[[Page 10526]]

disclosure? Should the Commission require that the brokers disclose 
transaction-specific information in all situations, and not just upon 
request? Alternatively, are there certain situations or products for 
which transaction-specific information should always be required?
    Q. Presentation of sales fee disclosure. Would the disclosure of 
upfront sales fees in the forms in Attachments 1-6--with separate 
columns for payment amount, fee in dollars, investment and fee as a 
percentage of net investment--effectively communicate information about 
the amount of those fees and their immediate impact on investment? If 
not, how should the forms be modified? Would it be appropriate to 
exclude the impact of letters of intent, rights of accumulation, 
purchases by related parties, or other customer-specific discounts, in 
light of the additional costs and complexity that could be associated 
with their inclusion?
     For disclosure of upfront sales fees, should the 
``investment amount'' equal the customer's payment less the amount of 
the sales fee? Should other fees, such as broker-imposed commissions or 
purchase fees, be deducted to determine the ``investment amount''?
     Would the proposed disclosure of deferred sales fees in 
the forms--with separate columns for investment amount, maximum fee in 
dollars and fee as a percentage of investment amount--effectively 
communicate information about the potential amount of those fees? Would 
focusing on maximum amounts of those fees, rather than providing year-
by-year breakdowns, effectively convey information about those fees' 
potential impact?
    Q. Comprehensive annual cost disclosure. Would the proposed method 
of disclosing comprehensive annual costs in the forms in Attachments 1-
6--with separate columns for investment amount and fees in dollars and 
fee as a percentage of investment amount--effectively communicate 
illustrative information about the potential amount of, and likely 
variations in, those costs? Would the proposed new point of sale 
disclosure forms adequately put investors on notice that the disclosed 
amount of the annual costs are illustrative, and that actual amounts 
are likely to vary? Should the forms include a statement that such 
annual costs would not be directly taken out of the investor's 
accounts--and would not be subject to separate disclosure as they are 
incurred--but rather would continuously be paid out of the assets of 
the funds the investor has purchased (including underlying funds in 
two-tiered 529 savings plan interests and variable insurance products)?
     Should point of sale disclosure include all the costs to 
the investor associated with owning covered securities (including 
mutual fund management and other costs), and not only distribution 
costs? If not, what costs should be included? Commenters are also 
invited to discuss whether investors perceive the economic impact of 
costs differently based on whether costs are charged directly or 
indirectly (i.e., fees that are deducted from fund assets).
     Should we require each category of annual fee to be 
separately quantified in percentage terms, as set forth in the proposed 
new forms? Should we require the aggregate of those annual ownership 
fees also to be quantified in dollar terms (based on the potential 
quantification standards discussed above)? Are there better ways to 
inform investors about the scope of those costs in dollar terms and to 
help investors understand the economic consequences of annual fees on 
an investment?
     Should point of sale disclosure set forth information 
about account fees that issuers may charge to typical investors in the 
covered security (other than fees that apply only in limited 
circumstances, such as returned check fees)? Should such account fees 
be expressed as a fixed dollar amount and/or as a percentage of assets 
(whichever is applicable)? If fees are applied only on accounts that 
are valued below a specified amount, should this threshold amount be 
disclosed? Commenters are also invited to discuss how disclosure of 
such fees could be expected to influence customers' decisions to 
purchase covered securities. Commenters also are invited to identify 
other fees that should be disclosed at point of sale, and discuss how 
disclosure could be done effectively.
     We also invite comment on the costs associated with 
providing dollar quantification of comprehensive fees, including the 
extent to which disclosure of transaction-specific information upon a 
customer's request would increase compliance costs.
     We note that the approach discussed here would require 
broker-dealers to make certain disclosures based on estimates, such as 
estimates of future first year ownership costs calculated with a total 
annual fee percentage that is derived from expense ratios reported in 
the current prospectus. The dollar estimates of those future first year 
costs also would be based on the assumption that the net asset value of 
an investment would not change during the first year following the 
investment. Broker-dealers would be required by rule to deliver those 
estimates, even though future outcomes may well differ from the 
estimates. Should the Commission address concerns about exposure to 
unfair private actions, for example, by requiring additional 
disclosures or providing a safe harbor? We would not expect private 
rights of action to result from non-fraudulent disclosures under the 
rule even if, for example, a broker-dealer erred by negligently 
transposing numbers between information in the prospectus and 
information reported at the point of sale.
    Q. In addition to disclosing cost information category-by-category 
(e.g., sales fees and annual ownership costs), should point of sale 
disclosure also depict ownership costs on an aggregate basis? 
Alternatively, should aggregate information be disclosed in lieu of 
category-by-category disclosure? Mutual fund prospectuses are required 
to estimate the total expenses associated with a $10,000 investment 
over one, three, five and ten year time horizons, based on an assumed 
five percent return and other assumptions. Those estimates help 
investors quantify the combined impact of disparate ownership costs 
such as sales fees and ongoing ownership costs. Those estimates also 
facilitate comparisons among share classes and funds. Would point of 
sale disclosure of information that similarly quantifies the aggregate 
impact of multiple cost categories provide a useful supplement to, or 
replacement for, category-by-category disclosure of ownership costs? If 
so, should disclosures of aggregate information reflect a range of 
investment amounts (such as $1,000, $50,000 and $100,000), consistent 
with other cost disclosures on the written point of sale form? On the 
other hand, would disclosure of aggregate cost information as a 
supplement to category-by-category information potentially confuse some 
investors by leading them to believe that those aggregate costs would 
be incurred in addition to other disclosed costs, rather than being an 
alternative way of expressing those costs? Would disclosure of 
aggregate information as a supplement to category-by-category 
information threaten to pose ``information overload'' that would reduce 
some investors'' use of point of sale disclosure? Would aggregate 
information be suitable as a replacement for disclosure of category-by-
category information? Alternatively, would aggregate information be 
inadequate as a replacement for category-by-category information? For 
example, would

[[Page 10527]]

aggregate information fail to explicitly inform investors about the 
types and timing of ownership costs that they would incur if they 
purchase a covered security? Further, would aggregate information be 
inadequate because its accuracy depends on the accuracy of underlying 
assumptions? Commenters are invited to suggest models by which 
aggregate cost information could be disclosed clearly on written point 
of sale forms as a supplement to, or a replacement for, category-by-
category information.\24\
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    \24\ Disclosure of aggregate cost information also may 
facilitate the disclosure and use of comparative information at the 
point of sale. That is because it may be easier for many investors 
to weigh a single aggregate cost amount against the benchmark posed 
by the aggregate cost average and range for alternative funds, than 
it would be to separately weigh the comparative context of upfront 
sales fees, deferred sales fees and annual ownership costs. As 
discussed above, we expect to address possible requirements for 
disclosure of comparative information in a later release.
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    Q. Disclosures tailored to share class and pricing structure. 
Should the Commission adopt separate forms for all share classes and 
pricing structures?\25\ In the alternative, should the Commission adopt 
an additional form that would permit disclosure of all potential costs 
for all share classes and pricing structures of mutual fund and 529 
savings plan investments, including purchase and redemption fees that 
are paid into fund assets?\26\ How could disclosure of the costs of 
owning classes of covered securities that are not illustrated by one of 
the forms attached as Attachments 1-6 (or funds with different pricing 
structures than those illustrated) be efficiently implemented?
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    \25\ Other pricing structures would include purchase and 
redemption fees some funds charge and which are paid into fund 
assets rather than for distribution.
    \26\ For example, in the Proposing Release the Commission set 
forth a generic point of sale form that was not specific to any 
particular share class or pricing structure.
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     Do the proposed new forms appropriately require disclosure 
of information about fees customers must pay upon purchase or 
redemption that are retained in fund assets (as distinct from sales 
loads and commissions that are paid to broker-dealers)? Should the 
required disclosure of redemption fees reflect the duration of such 
redemption fees? Should this type of disclosure be required to be 
quantitative or narrative, depending on the fee being disclosed? For 
example, should redemption fees imposed on short-term holdings (such as 
holdings of 180 days or less) be disclosed in narrative terms, with 
other redemption fees disclosed the same way that back-end sales loads 
would be disclosed (consistent with the quantification standards 
discussed above)? Should it include other information about other costs 
of owning covered securities not otherwise required to be disclosed in 
our proposed rules and forms, such as the one-time application fees 
that some states charge upon initial investments in their 529 savings 
plan interests? Is the placement of the disclosure of the application 
fee on the B and C class disclosures for 529 plans appropriate?
    Q. Disclosure of all share classes under consideration. Would it be 
appropriate to require a broker-dealer to provide point of sale 
information with regard to all share classes that are under 
consideration at the point of sale?
    Q. Disclosure of revenue sharing payments. Do the point of sale 
disclosure forms in Attachments 1-6 provide sufficient information 
about revenue sharing arrangements, including where to find more detail 
about those arrangements, to inform customer's investment decisions? In 
light of concerns expressed by commenters, including investors, that 
complex disclosures potentially could distract investors from other 
important information, is it appropriate to omit the sources and 
amounts of revenue sharing payments received by the broker-dealer from 
point of sale disclosures and require them instead to be disclosed on 
the Internet and made available to customers upon request through a 
toll-free number? On the other hand, investors may find this 
information useful at the point of sale. Should we require the 
disclosure of the source and amount of revenue sharing payments at the 
point of sale? Commenters are invited to discuss how revenue sharing 
information can be disclosed simply and efficiently.
     Should the requirement to disclose the existence of 
revenue sharing payments focus on payments, either to a broker-dealer 
or its affiliate, that are directly or indirectly funded by some or all 
of the following: an investment adviser; a principal underwriter; and 
an administrator or transfer agent of the issuer of the covered 
security (and of issuers of underlying securities with regard to two-
tiered products)? \27\ Should the disclosure requirement extend to 
payments from issuers and/or from other parties not specifically 
identified above? \28\ Would such a requirement be adequate to prevent 
evasion of the proposed disclosure obligation? The revenue sharing 
disclosure obligation set forth in the Proposing Release focused on 
payments received from persons ``within the fund complex.'' Under this 
targeted approach to disclosure of revenue sharing payments, would it 
be appropriate to eliminate the definition of ``fund complex''?
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    \27\ Such an approach would be an alternative to the proposed 
requirement that the broker-dealer identify payments received from 
persons within a ``fund complex'', including affiliates of the fund 
but not the fund issuer.
    \28\ While a commenter has suggested that the revenue sharing 
disclosure requirement be limited to payments ``in connection with'' 
the sale or distribution of covered securities, such an approach may 
inject too great an element of subjectivity into the disclosure 
requirement, by permitting a broker-dealer to characterize a 
particular payment as not distribution-related, and claim no need to 
disclose it. It may be more effective to implement an approach that 
requires disclosure of the types of payments that can be expected to 
compensate broker-dealers for distribution, and that does not reach 
to other payments.
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     Should the proposed definition of ``revenue sharing'' be 
replaced by a definition of ``promotional payment'' to more accurately 
reflect the nature of such payments? If the required disclosure were to 
be targeted, as discussed above, to payments received from investment 
advisers, principal underwriters, administrators or transfer agents, 
should the definition of either ``revenue sharing'' generally encompass 
payments from an investment adviser, principal underwriter, 
administrator or transfer agent to a broker-dealer or associated 
person? Should payments that constitute dealer concessions be excluded 
from the definition because dealer concessions do not raise the same 
conflicts as special compensation arrangements, which warrant special 
disclosure? \29\ Should payments funded by asset-based distribution 
fees (such as rule 12b-1 fees) be excluded because they would be 
included elsewhere in the point of sale disclosure? Should payments 
that represent compensation for providing services as a principal 
underwriter of a covered security be included or do those payments not 
pose the same conflicts of interest? \30\
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    \29\ As defined in the Proposing Release, the dealer concession 
consists of fees earned by the broker-dealer at the time of sale 
from the issuer or its agent, the distributor or another broker-
dealer.
    \30\ The point of sale rules propose an exception for 
underwriters. Even if a targeted underwriter exclusion were adopted, 
however, such a carve-out might be inappropriate at times, such as 
when an underwriter is broker of record on an ``orphan'' account 
originated by another broker-dealer.
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    Should payments to an issuing insurance company from funds 
underlying variable insurance products be included? What conflicts do 
these payments pose? Would other inclusions or exclusions be 
appropriate?
     If the revenue sharing disclosure were targeted, as 
discussed above, should the required disclosure exclude payments made 
``solely in connection''

[[Page 10528]]

with securities issued by a person that is not a ``related issuer'' of 
the issuer of the covered security? If so, would a definition of 
``related issuer'' appropriately encompass the issuer of the covered 
security (and underlying securities in the case of two-tiered 
products), and the issuers of other covered securities that hold 
themselves out as related companies for purposes of investment or 
investor services, as well as other affiliated issuers? \31\ Would 
there be better ways of excluding payments that are intended to promote 
the sale of a covered security other than the security that the 
customer is considering purchasing?
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    \31\ Such a definition would be consistent with other securities 
laws provisions that identify investment company affiliates in part 
depending on whether two companies hold themselves out as related 
companies. See, e.g., Exchange Act rule 15a-6 (defining term 
``family of investment companies'' in part based on whether 
registered investment companies that share the same investment 
adviser or principal underwriter ``hold themselves out to investors 
as related companies for purposes of investment and investor 
services''); Investment Company Act rule 11a-3 (defining term 
``group of investment companies'' in part based on whether 
registered open-end investment companies hold themselves out to 
investors as related companies for purposes of investment and 
investor services).
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     If the required revenue sharing disclosures were targeted 
in such a way, should the disclosure requirement further exclude 
payments received by an associated person if the broker-dealer making 
the disclosure reasonably determined that the associated person 
received those payments solely in connection with the distribution of 
covered securities by a different broker-dealer or by a bank? \32\ Are 
there other ways of excluding payments to affiliates that would not 
pose conflicts of interest for the broker-dealer and would pose fewer 
compliance challenges? Would such an exclusion for payments received by 
affiliates that are linked solely to a second broker-dealer's 
distribution activities be justified in part by the expectation that 
the second broker-dealer would be required to provide point of sale 
disclosures to put its own customers on notice of those payments? 
Should such an exclusion apply if payments received by an affiliate are 
not solely linked to the distribution activities of a second broker-
dealer or a bank?
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    \32\ Securities activities by banks are subject to a different 
regulatory regime, so long as the banks meet applicable exceptions 
and exemptions from the definitions of ``broker'' and ``dealer'' set 
forth in Sections 3(a)(4)(B) and 3(a)(5)(B) of the Exchange Act and 
the rules thereunder. See also Securities Exchange Act Release No. 
50618 (Nov. 1, 2004) (order extending temporary exemption of banks, 
savings associations, and savings banks from the definition of 
``broker'' under Section 3(a)(4) of the Exchange Act).
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     If payments received by an affiliate of a broker-dealer 
would not have to be disclosed if they are ``solely connected'' with 
the distribution activities of another broker-dealer or a bank, what 
facts and circumstances should a broker-dealer have to consider to 
determine whether revenue sharing received by an affiliate are in fact 
``solely connected'' with the distribution activities of another 
broker-dealer or a bank? \33\ In the case of payments that do not 
represent transaction-based or asset-based payment streams, such as 
payments that are designated as compensation for seminar sponsorship, 
should the broker-dealer be permitted to avoid having to disclose 
payments received by an affiliated broker-dealer if the payments that 
it receives and the payments that the affiliated broker-dealer receives 
are reasonably proportional to the relative size of the two broker-
dealers' distribution activities? \34\
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    \33\ For example, would it be reasonable to conclude that 
payments received by an associated person (including a second 
broker-dealer or a bank) are solely in connection with the 
distribution activities of a second broker-dealer or a bank--and 
hence to fall within such an exclusion--if the payments are 
comprised of transaction-based streams that are linked solely to 
transactions effected by that other broker-dealer or bank, or if the 
payments are comprised of asset-based streams that are linked solely 
to assets held by customers of that other broker-dealer or bank?
    \34\ For instance, if the disclosing broker-dealer and the 
affiliated broker-dealer each have sold roughly the same amount of 
covered securities on behalf of the fund complex in the past year, 
and the two broker-dealers each received roughly the same amount of 
such miscellaneous payments, then would it be reasonable for the 
disclosing broker-dealer to conclude that the miscellaneous payments 
received by the affiliated broker-dealer were solely in connection 
with the affiliated broker-dealer's distribution activities? If, in 
contrast, the affiliated broker-dealer received materially more of 
those miscellaneous revenue sharing payments then the disclosing 
broker-dealer, while relative sales still were roughly the same, 
then would the disclosing broker-dealer reasonably have to inform 
the customer about those payments?
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     Would such a comprehensive alternative to revenue sharing 
disclosure, including the possible elimination of the definition of 
``fund complex,'' adequately exclude payments that a broker-dealer 
receives in connection with underwriting municipal bonds?
     Is the description in the attached forms of the conflict 
that arises as a result of revenue sharing arrangements readily 
understandable? If not, how should it be modified? Should the term 
``revenue sharing'' be explicitly stated in the description of the 
conflict or would this term be confusing?
    Q. Disclosure of special incentives to broker-dealer sales 
personnel. Broker-dealers would be required to disclose on the proposed 
new forms, if true, that sales personnel are paid more for selling the 
covered security over other securities. Is this disclosure appropriate? 
Is it useful to investors? Is the language used to describe this 
conflict of interest appropriate? Should point of sale disclosure of 
differential compensation practices cover situations in which 
securities pay a relatively high dealer concession or commission to the 
broker-dealer, rather than only the situation where a broker-dealer 
provides an extra financial incentive to its sales personnel for 
selling a covered security?
     In light of concerns expressed by commenters that overly 
complex disclosures could distract investors from other important 
information, is it appropriate and helpful to omit quantified 
information about dealer concessions from point of sale disclosures and 
require it instead to be disclosed on the Internet, as discussed below?
     In addition, the attached forms for class B and class C 
shares would require disclosure of the fact, if true, that sales 
personnel are paid more for selling those classes of securities than 
class A shares. Is this disclosure appropriate? Is it helpful to 
investors? Should it appear on the forms for other classes of shares?
     Do the references pointing investors to the broker-
dealer's Web site for more information about ``special incentives'' 
adequately inform investors of where they can find more details about 
revenue sharing payments? Should other terms be used, such as ``extra 
incentives'' or ``conflicts of interest''?
    Q. References to the fund prospectus as the primary source of 
information about the fund. Would the approach for disclosure of other 
information on the forms in Attachments 1-6 (apart from ownership costs 
and conflicts of interest), such as the fact that investors should take 
other factors into account when making investment decisions, strike a 
reasonable balance between disclosure that is easy to understand and 
disclosure that is appropriately comprehensive?
    Q. Permissive omission of categories where no information is 
applicable. Would it be appropriate to permit broker-dealers to omit 
categories of information that are not applicable, or should disclosure 
of such categories be required to promote comparability? Should 
conflict of interest information be presented in all situations to 
provide investors with full conflict information about all funds they 
are considering? Should some sections be required to be omitted if 
inapplicable, such as sections on upfront fees for forms for variable

[[Page 10529]]

annuities that do not charge them? Would disclosure of some 
inapplicable information (for example, the fact, if true, that a 
broker-dealer is not paid extra for promoting one fund over others) 
serve to educate investors, or enhance their understanding of the 
remaining disclosure?
     In addition, would it be appropriate to permit broker-
dealers to omit all point of sale information, thereby eliminating all 
point of sale disclosures, in circumstances where there are no 
distribution-related expenses or conflicts of interest required to be 
disclosed at the point of sale? Would such an approach create a 
competitive advantage for funds that take advantage of such an 
exception? Would any such advantage be appropriate?

B. Oral Disclosure of Point of Sale Information

    Commenters expressed a variety of views about the proposed 
requirement for point of sale information to be disclosed orally when 
the point of sale occurs through means of oral communication other than 
at an in-person meeting (such as through a telephone conversation). 
Some consumer advoca