SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 230, 239, 270, and 274

[Release Nos. 337036, IC19955, File No. S73293]

RIN 3235AF00

Exemption for Open-End Management Investment Companies Issuing Multiple
Classes of Shares; Disclosure by Multiple Class and Master-Feeder Funds

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule, proposed amendments to rules and forms, and request for
comment.

SUMMARY: The Commission is proposing for public comment a new rule and an
amendment to a rule under the Investment Company Act of 1940. The new rule
would allow open-end management investment companies ("mutual funds'') to
issue multiple classes of voting stock representing interests in the same
portfolio, subject to conditions intended to prevent investor confusion,
assure fair expense allocation and voting rights, and prevent conflicts of
interest among classes. The proposed rule would eliminate the need for funds
issuing multiple classes to apply for exemptions. The proposed rule amendment
would clarify how the requirements for approval of certain distribution
arrangements would apply to funds with multiple classes of shares. Finally,
the Commission is proposing for public comment amendments to rules under the
Investment Company Act and the Securities Act of 1933, amendments to the form
for registration statements of open-end investment companies, and amendments
to related forms. These amendments would establish disclosure requirements for
prospectuses, advertisements, and sales literature of multiple class funds, as
well as of "master-feeder'' funds, which present many of the same disclosure
issues as multiple class funds. These disclosure amendments are intended to
address concerns about the complexity of sales and service charges of these
funds.

DATES: Comments must be received on or before February 22, 1994.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Stop
69, Washington, DC 20549. All comment letters should refer to File No.
S73293. All comments received will be available for public inspection and
copying in the Commission's Public Reference Room, 450 Fifth Street, NW.,
Washington, DC 20549.

FOR FURTHER INFORMATION CONTACT:

Regarding rule 18f3 and amendments to rule 12b1, Roseanne Harford, Senior
Counsel, or Diane C. Blizzard, Assistant Director, Office of Regulatory
Policy, (202) 2722048, regarding proposed disclosure and reporting
requirements, James M. Curtis, Senior Counsel, Office of Investment Company
Regulation, (202) 5042406, or Robert G. Bagnall, Assistant Chief, Office of
Regulatory Policy, (202) 2723042, and regarding changes to Form NSAR,
Lawrence A. Friend, Chief Accountant, Office of Disclosure and Review, (202)
2722106, all at the Division of Investment Management, Securities and
Exchange Commission, Mail Stop 106, 450 Fifth Street, NW., Washington, DC
20549.

SUPPLEMENTARY INFORMATION: The Commission today is requesting public comment
on proposed rule 18f3 [17 CFR 270.18f3], and related amendments to rule
12b1 [17 CFR 270.12b1], both under the Investment Company Act of 1940 [15
U.S.C. 80a] ("Investment Company Act'' or "Act''). The Commission is
requesting public comment on proposed amendments to rule 34b1 under the
Investment Company Act [17 CFR 270.34b1], rules 134, and 482 [17 CFR 230.134,
and 482] under the Securities Act of 1933 ("Securities Act'') [15 U.S.C.
77a77aa], and Forms N1A [17 CFR 239.15A, 274.11A], N14 [17 CFR 239.23], and
NSAR [17 CFR 274.101]. The Commission also is requesting public comment on a
revision to amendments to rule 482 that were proposed for public comment
earlier this year relating to "off-the-page'' prospectuses.1  These
proposals would implement a recommendation made in the report issued last year
by the Division of Investment Management ("Division''), Protecting Investors:
A Half Century of Investment Company Regulation ("Protecting Investors
Report''), Chapter 8, The Sale of Open-End Investment Company Shares.2 

1 See Off-the-Page Prospectuses for Open-End Management Investment
Companies, Securities Act Release No. 6982 (Mar. 5, 1993), 58 FR 16141.

2 SEC Division of Investment Management, Protecting Investors: A Half
Century of Investment Company Regulation, 330332 (1992).

It is likely that further multiple class exemptive applications will be
received and reviewed pending further action on these proposals. These
applications will continue to be reviewed on the same basis as previous
multiple class applications and should not request relief based on these
proposals.

Table of Contents

Executive Summary

I. Background

II. Discussion

A. Rule 18f3

1. Limits on Class Differences

a. Differences in Shareholder Service or Distribution Arrangements and Other
Expenses

b. Class Voting

c. Fund-Wide Rights and Obligations

2. Allocation of Fund-Wide Expenses

3. Board Review

4. Exchange Privileges and Conversions

B. Rule 12b1

C. Disclosure

1. Prospectus Disclosure

a. Legend Concerning Classes or Feeder Funds Not Offered Through a Prospectus

b. Cross-Disclosure about Certain Other Classes or Feeder Funds

c. Comparison of Classes or Feeder Funds

d. Alternative Regulatory Approaches

2. Advertising and Sales Literature

a. Legends Concerning Other Classes or Feeder Funds

b. Performance Information

3. Off-the-Page Prospectuses

III. Cost/Benefit of Proposed Action

IV. Summary of Initial Regulatory Flexibility Analysis

V. Statutory Authority

VI. Text of Proposed Rule and Rule and Form Amendments

EXECUTIVE SUMMARY

Since 1985, the Commission has issued over 90 orders allowing funds to issue
multiple classes. The orders impose as many as 20 conditions intended to
ensure that multiple class funds do not present the investor protection
concerns that section 18 of the Investment Company Act was designed to
address. Among other things, the conditions limit class differences, subject
to oversight by a fund's board of directors.

The Commission is proposing rule 18f3 under the Investment Company Act, which
would permit funds to issue multiple classes of shares without the need to
seek exemptive orders from the Commission. The rule would require certain
differences in the rights and obligations of different classes, permit certain
other differences among classes, specify the matters on which class voting is
required, and prescribe how income and expenses must be allocated. The rule
also would delineate the responsibilities of the board of directors. Finally,
the rule would permit, but not require, different classes to have different
exchange privileges and conversion rights. A related amendment to rule 12b1
would clarify that a rule 12b1 plan must treat each class separately and
require separate director and shareholder approval. Rule 18f3 would simplify
the process for issuing multiple classes and, by eliminating the need for
funds to apply for exemptive orders, save time and reduce expenses. It also
would reduce the Commission's burden of reviewing the applications.

Over the past few years, a number of fund sponsors have adopted a distribution
arrangement designed to achieve the business goals of multiple class funds
without the need to obtain Commission relief under section 18. This
"master-feeder'' arrangement contemplates the use of a two-tier structure in
which one fund invests in another fund.3  Although master-feeder structures
are functionally similar to multiple class funds, they do not need exemptive
relief and are currently subject to different disclosure requirements.

3 Master-feeder funds are often referred to as "core and feeder'' or "hub
and spoke'' funds; "Hub & Spoke'' is a registered service mark of Signature
Financial Group, Inc.

Proposed disclosure amendments would apply to both multiple class and feeder
funds. Prospectuses would be required to include a prominent legend following
the fee table providing information regarding the availability of any other
classes or feeder funds not offered in that prospectus. If any classes or
feeder funds are offered or made available through the same broker, dealer,
bank, or other financial intermediary and permit investors to choose among
alternative arrangements for sales and related charges (for example "dual
distribution'' classes), a prospectus for any of those classes or feeder funds
would be required to provide full cross-disclosure about the others in
response to Items 2 through 9 of Form N1A. If more than one class or feeder
fund is offered in a prospectus, or if there is cross-disclosure about another
class or feeder fund, the prospectus would be required to discuss the
differences among those classes or feeder funds and include a line graph
comparing the hypothetical value of holdings of those classes or feeder funds
upon redemption at the end of each year during a ten year period. These
requirements should help investors determine and compare the expenses they may
pay and the return they may receive under various circumstances.

Proposed amendments to advertising and sales literature disclosure
requirements are similar to the prospectus proposals. Multiple class and
master-feeder funds would be required to include a legend in advertising and
sales literature similar to the proposed legend following the fee table in the
prospectus. An amendment to rule 482 would require multiple class and
master-feeder fund advertising that contains performance figures to include,
with equal prominence, the performance of all classes and feeder funds that
are subject to the cross-disclosure requirement. Another amendment to rule 482
would require advertisements to provide long-term return information for a
fund's portfolio even if that information does not exist for the class or
feeder fund that is the subject of the advertisement.

The proposal would revise the recently proposed amendments to rule 482 to
delete those amendments' prohibition on the use of off-the-page prospectuses
(advertisements containing an order form) by multiple class and master-feeder
funds. As re-proposed, those amendments to rule 482 would permit multiple
class funds and feeder funds to use off-the-page prospectuses.

I. Background

Many mutual funds issue more than one class of shares representing interests
in the same portfolio of securities. Some of these funds use different classes
to offer investors a choice of methods for paying for the costs of selling
fund shares. These funds typically offer a class with a front-end sales
load4  and a low distribution fee5  (or no such fee) and a class with a
higher distribution fee and a contingent deferred sales load ("CDSL'').6 
The latter arrangement is commonly called a "spread load.'' A spread load
class also may feature an automatic conversion of its shares for shares in a
class with a lower distribution fee after a specified period.7  More
recently, some funds have been offering a third class with a so-called "level
load,'' which class bears a relatively high distribution fee but no front-end
load or CDSL.8 

4 A front-end sales load is a charge paid by the investor at the time of
purchase.

5 A distribution fee is a charge to fund assets that may be used to pay
certain distribution expenses in accordance with rule 12b1. 17 CFR 270.12b1.
Such fees often are referred to as "rule 12b1 fees.''

6 See, e.g., Putnam Adjustable Rate U.S. Government Fund, Investment Company
Act Release Nos. 18637 (Mar. 30, 1992), 57 FR 11639 (Notice of Application)
and 18676 (Apr. 24, 1992), 51 SEC Docket 799 (Order). A CDSL is a sales charge
that is assessed when shares are redeemed. It generally declines over time and
is designed to recover any distribution costs that have not yet been recovered
from the distribution fees. To impose a CDSL, funds request exemptions from
sections 2(a)(32), 2(a)(35), and 22(d) of the Act [15 U.S.C. 80a2(a)(32),
2(a)(35), and 22(d)] and rule 22c1[17 CFR 270.22c1]. See e.g., Smith
Barney Equity Funds, Investment Company Act Release Nos. 19005 (Oct. 7, 1992),
57 FR 47156, 47158 (Notice of Application) and 19079 (Nov. 3, 1992), 52 SEC
Docket 3640 (Order).

7 The Commission's orders require that such conversions occur on the basis
of the relative net asset values of the classes and not involve any load or
other fee. See, e.g., Colonial Advanced Strategies Gold Trust, Investment
Company Act Release Nos. 18650 (Apr. 10, 1992), 57 FR 13780, 13785 (Notice of
Application) and 18692 (May 6, 1991), 51 SEC Docket 898 (Order).

8 See, e.g., PaineWebber America Fund, Investment Company Act Release Nos.
18758 (June 4, 1992), 57 FR 25093, 25094 (Notice of Application) and 18820
(June 30, 1992), 51 SEC Docket 1844 (Order).

Many funds issue different classes in order to use different channels of
distribution and to reach different investor markets. These funds typically
target different investor markets, offering each a separate class with an
arrangement for shareholder services or a distribution plan that is tailored
to that market.9  For example, these funds may create a separate class or
classes for financial institutions that invest on behalf of their customers,
such as banks, pension plans, and insurance companies. The institutions
already may provide certain services to their customers (e.g., maintaining
client records, processing purchase orders, and responding to customer
inquiries). 10 Multiple classes allow funds to design classes with fees and
services that complement those of the institutions. In some cases, the same
fund may offer both classes designed for different distribution channels and
classes providing a choice of methods for paying distribution costs. 11

9 See, e.g., SEI Liquid Asset Trust, Investment Company Act Release Nos.
17878 (Nov. 27, 1990), 55 FR 49967, 49968 (Notice of Application) and 17915
(Dec. 24, 1990), 47 SEC Docket 2014 (Order); Centerland Fund, Investment
Company Act Release Nos. 18508 (Jan. 30, 1992), 57 FR 4662, 4663 (Notice of
Application) and 18566 (Feb. 25, 1992), 50 SEC Docket 1909 (Order).
Shareholder services may include establishing and maintaining customer
accounts and records, providing periodic account statements, arranging for
bank wires, processing divided payments, forwarding fund communications (such
as proxies, shareholder reports and dividend, distribution, and tax notices),
answering routine customer inquiries, and assisting with changes in dividend
options. Distribution services may include advertising and marketing, sales
support services, and preparing, printing, and mailing sales literature,
prospectuses, and other reports to prospective investors. The scope of
"shareholder services'' in this context may differ from that of the term
"service fee'' in the rule on maximum mutual funds sales charges of the
National Association of Securities Dealers, Inc. ("NASD''). NASD, Rules of
Fair Practice, Art. III, section 26(b)(9). That term "is not intended to
include transfer agent, custodian, or similar fees'' or "charges for the
maintenance of records, recordkeeping and related costs.'' NASD Notice to
Members No. 9312 (Feb. 1993).

 10Fiduciary obligations under federal banking or pension laws may restrict
an institution's ability to invest customer accounts in shares of funds that
impose fees for services the institution already provides. See 12 CFR 9.12(a)
(restricting bank fiduciaries from accepting shareholder servicing fees). See
also Employee Retirement Income Security Act section 406(a)(i), 29 U.S.C.
1106(a)(1). Several funds have created separate classes for institutions
depending on whether they have agency or custodial relationships, as opposed
to fiduciary relationships, with their customers. See, e.g., The Kent Funds,
Investment Company Act Release Nos. 19033 (Oct. 15, 1992), 57 FR 48415 (Notice
of Application) and 19094 (Nov. 12, 1992), 52 SEC Docket 3743 (Order).

 11See, e.g., The New England Funds, Investment Company Act Release Nos.
19067 (Oct. 28, 1992), 57 FR 52663 (Notice of Application) and 19118 (Nov. 24,
1992), 52 SEC Docket 4261 (Order).

Because institutions investing for their own account may need less service
than retail investors participating directly or through intermediaries, funds
may offer them a separate class with reduced fees and sales loads. 12 On the
other hand, individual investors using retail brokers may have greater service
needs that funds may meet by offering a different class with relatively higher
fees and loads.

 12See, e.g., PaineWebber, supra note 8, 57 FR at 25094.

Investment company sponsors seeking to implement multiple class arrangements
have asserted that the arrangements offer a number of benefits. Multiple
classes avoid the duplicative portfolio and fund management costs that are
required by "clone funds'' 13 and thus may be a less expensive alternative
to the creation of these funds. Moreover, multiple classes may enable funds to
attract larger asset bases, which, in turn, may permit them to spread fixed
costs over more shares, qualify for discounts in advisory fees known as
"breakpoints,'' and otherwise experience economies of scale, all of which may
lower per share fees and expenses. 14 Funds also have maintained that a
larger asset base permits greater portfolio liquidity and diversification.
15

 13Clone funds are separate funds with similar portfolios but different
distribution or service arrangements. For small investor markets, clone funds
may not be viable. See, e.g., Arch Fund, Inc., Investment Company Act Release
Nos. 15489 (Dec. 22, 1986), 51 FR 51250, 51251 (Notice of Application) and
15532 (Jan. 13, 1987), 37 SEC Docket 568 (Order) ("Applicants believe that it
would be inefficient, and in some instances economically or operationally
infeasible, to organize a separate investment Portfolio for each class of New
Shares created'').

 14See, e.g., G.T. Global Growth Series, Investment Company Act Release Nos.
18961 (Sept. 17, 1992), 57 FR 43992 (Notice of Application) and 19022 (Oct.
14, 1992), 52 SEC Docket 2887 (Order).

 15See, e.g., MarketMaster Trust, Investment Company Act Release Nos. 17785
(Oct. 9, 1990), 55 FR 42136 (Notice of Application) and 17838 (Nov. 5, 1990),
47 SEC Docket 1324 (Order).

The issuance of multiple classes implicates sections 18(f)(1), 18(g), and
18(i) of the Investment Company Act. 16 Section 18(f)(1) generally makes it
unlawful for a registered open-end management investment company to issue any
class of "senior security.'' Section 18(g) defines senior security to include
any stock of a class having a priority over any other class as to distribution
of assets or payment of dividends. Section 18(i) requires that every share of
stock issued by a registered management investment company be voting stock,
with the same voting rights as every other outstanding voting stock.

 1615 U.S.C. 80a18(f)(1), (g), (i).

The issuance of multiple classes may conflict with section 18(f)(1) because a
class with lower expenses will have a greater net asset value or higher
dividend per share than other classes. 17 A class with a higher net asset
value may be considered to have a priority as to the distribution of assets;
similarly, a class receiving a higher dividend may be considered to have a
priority over classes with lower dividends. The issuance of multiple classes
also may conflict with section 18(i) unless each class has the same voting
rights. 18 Section 18 is, to a large extent, designed to prohibit material
differences among the rights of shareholders in a fund. This section
implements the policy expressed in section 1(b)(3) of the Investment Company
Act 19 of preventing funds from "issu[ing] securities containing inequitable
or discriminatory provisions.'' Thus, funds have applied for exemptions from
these sections to issue multiple classes.

 17Because each class has different asset-based service or distribution
fees, the classes have different total expenses and, thus, different net
incomes. Differences in net income may be reflected in different net asset
values, different dividends, or both.

 18Cf. Comm. on Interstate and Foreign Commerce, Investment Company Act
Amendments of 1970, H.R. Rep. No. 1382, 91st Cong., 2d Sess. 28 (1970) and
Comm. on Banking and Currency, Investment Company Amendments Act of 1969, S.
Rep. No. 184, 91st Cong., 1st Sess. 38 (1969) (both discussing the need to
clarify section 18(i) to permit separate voting rights for classes of
shareholders in series funds when their interests may be distinct).

 1915 U.S.C. 80a1(b)(3).

Section 18(f)(1) was intended to protect investors from certain abuses
associated with complex investment company capital structures, including
excessive leverage, conflicts of interest among classes, and investor
confusion. 20 Section 18(i) addresses certain inequitable and discriminatory
shareholder voting provisions that were associated with many investment
company securities before the enactment of the Investment Company Act. 21
Multiple class funds do not involve leverage because each class represents
interests in the same portfolio of investments and participates in all the
portfolio's gains and losses. Multiple class funds, however, arguably could
implicate the other concerns underlying these sections.

 20See Investment Trusts and Investment Companies: Hearings on S. 3580
Before a Subcomm. of the Senate Comm. on Banking and Currency, 76th Cong., 3d
Sess. 27274, 1044 (1940).

 21Id. at 26575, 102537.

The issuance of classes of shares with different rights and obligations may
create conflicts among those classes. For example, it may not be clear whether
certain expenses appropriately represent expenses of the fund or expenses of a
particular class. Voting rights may be of concern in multiple class funds
because each class pays for its own service or distribution arrangements and
might approve different expenses and terms than would be approved by
shareholders who do not pay for those arrangements. In such a case, equal
shareholder voting could be inappropriate. 22 Fee and load variations among
classes, if not adequately disclosed, also may confuse investors and make
comparisons with other funds more difficult.

 22For example, when each class pays all the expenses of its shareholder
services or distribution plan, one class has no interest in whether the other
classes' services are being provided on a cost-effective basis. It does,
however, have an interest in whether the services attract new investors to the
fund, if fund-wide economies of scale are realized as a result. If
shareholders who do not bear the expenses of an arrangement are permitted to
vote on it, they could approve higher fees and expenses than the class itself
would choose.

Since 1985, the Commission has issued over 90 exemptive orders allowing funds
to issue multiple classes. 23 The orders impose as many as 20 conditions
intended to ensure that multiple class funds do not present the investor
protection concerns that section 18 was designed to address. 24 Among other
things, the conditions limit class differences and subject them to oversight
by the fund's board of directors.

 23See, e.g., orders cited supra notes 413. Multiple class funds have
become a particularly significant phenomenon in the last three years: since
January 1, 1990, the Commission has issued more than 70 multiple class orders.

 24The conditions vary somewhat depending on the particular features of the
structure (e.g., whether the fund intends to offer conversion rights or to
allocate expenses other than service and distribution fees).

An exemptive rule would simplify the process for issuing classes and, by
eliminating the need for funds to apply for orders, save time and reduce
expenses. It also would reduce the Commission's burden of reviewing the
applications. Therefore, the Commission is proposing such a rule, which is
designed to streamline the conditions imposed on multiple class funds while
preserving investor protection. The Commission also is proposing amendments to
rule 12b1 to clarify its applications to multiple class funds. Finally, the
Commission is proposing certain related disclosure and reporting requirements
that would apply both to multiple class funds and to master-feeder funds.

Consistent regulatory treatment of multiple class and master-feeder funds is
appropriate because of certain similarities between them. In master-feeder
structures, one or more open-end management investment companies with their
own service or distribution arrangements (the "feeder funds'') hold as their
only investment securities shares of a single open-end management investment
company (the "master fund'') that has the same investment objective as the
feeder funds. This fund structure generally relies on a statutory exemption,
25 in contract to the multiple class arrangement, which necessitates
exemptive relief from certain provisions of section 18. 26 Like multiple
class funds, feeder funds may be sold to customers of different institutions
(such as brokers, banks, and insurance companies) and may target different
markets (such as retail investors, institutional investors, and bank trust
customers, as well as off-shore investors). Like the multiple class structure,
the master-feeder structure also may be used to offer investors a choice of
methods for paying distribution costs: e.g., a choice between a feeder fund
with a front-end sales charge and a low asset-based distribution fee and a
feeder fund with a higher asset-based distribution fee and a CDSL but no
front-end sales charge. Thus far, however, this use is infrequent. 27

 25Section 12(d)(1)(E) of the Investment Company Act has been interpreted to
except the master-feeder structure from the general prohibition against fund
holding companies or "funds of funds.'' 15 U.S.C. 80a12(d)(1)(E) (the
exception applies if the only investment security held by a registered
investment company is the security of another investment company).

 26Unlike the classes of multiple class funds, the feeder funds of
master-feeder funds are considered separate issuers, whose securities are not
senior securities subject to the limitations of section 18. See supra notes 16
to 22 and accompanying text. Consequently, feeder funds do not require
exemptive relief from section 18 to offer their shares.

 27But see, e.g., Hyperion Short Duration U.S. Government Fund, Prospectus,
File Nos. 3338378 and 8116262 (Feb. 26, 1993) (front-end load) and Hyperion
Short Duration U.S. Government Fund II, Prospectus, File Nos. 3338380 and
8116210 (Feb. 26, 1993) (spread load); Eaton Vance Municipals Trust II,
Registration Statement, File Nos. 3371320 and 8118134 (Nov. 5, 1993)
(different feeder funds are different series of same trust and offer choice of
level load, spread load, and front-end load).

II. Discussion

A. Rule 18f3

Proposed rule 18f3 would create a limited exemption from sections 18(f)(1)
and 18(i) for funds that issue multiple classes of shares with varying
arrangements for shareholder services and distribution. Multiple class funds
with existing exemptive orders would be allowed to use the rule but would not
be required to do so. 28

 28In either case, funds would be required to comply with the proposed
disclosure requirements discussed below.

Proposed rule 18f3 includes a number of conditions that would require certain
differences in the rights and obligations of different classes, permit certain
other differences among classes, and specify the matters on which class voting
is required. The rule also would prescribe how income and expenses must be
allocated and delineate the responsibilities of the board of directors,
including the directors who are not "interested persons.'' 29 Finally, the
rule would permit, but not require, different classes to have different
exchange privileges and conversion rights.

 29See section 2(a)(19) of the Investment Company Act, 15 U.S.C.
80a2(a)(19). This release refers to such directors as "independent
directors.''

1. Limits on Class Differences

The exemptive orders issued to date by the Commission for multiple class funds
have addressed the potential for conflicts among classes by limiting the
permissible differences in shareholder or distribution services and payments
applicable to each class; certain other expenses borne by the classes; and the
voting rights applicable to the classes. 30 The orders require that all
classes represent interests in the same portfolio of investments and be
identical in all respects except for differences in fees and expenses related
to their different arrangements, separate voting on their different
arrangements and other matters for which separate class voting is appropriate,
and any differences in exchange privileges, conversion, features, and class
designations. 31

 30To a large degree, similar conflicts may arise today with separate funds
in the same investment company complex, when different funds share the
administrators and providers of services. For example, funds and fund
complexes allocate the shared cost of responding to shareholder inquiries.

 31See, e.g., Smith Barney, supra note 6, 57 FR at 47159.

Proposed paragraph (a) essentially would codify this approach. 32 Paragraph
(a)(1) would require that each class have a different arrangement for
distribution or shareholder services, paragraph (a)(2) would require that each
class bear all of the expenses of its arrangement, paragraph (a)(3) would
require that each class have the exclusive right to vote on matters relating
solely to its arrangement, and paragraph (a)(4) would require that each class
vote separately on matters in which the interest of that class are different
from the interests of any other class. Paragraph (a)(5) would require that
fund shareholders have, in all other respects, the same rights and
obligations, regardless of class.

 32Exchange privileges and conversion features are discussed below in
connection with proposed paragraph (d). See infra section II.A.4.

a. Differences in shareholder service or distribution arrangements and other
expenses. Proposed paragraph (a)(1)(i) would require that each class have a
different arrangement for shareholder services, the distribution of
securities, or both. Paragraph (a)(1)(i) is intended to encompass all of the
class arrangements that the Commission has exempted by order. Thus, an
arrangement for shareholder services could include any services provided to
shareholders of one class, including transfer agency services and services
related to shareholder relationships and account administration. An
arrangement for the distribution of securities could include various
distribution activities on behalf of the fund and the terms of payment for
those activities. 33

 33See supra note 9 for more detailed examples of shareholder and
distribution services.

An arrangement would be considered a different arrangement if it involved
differences in the amount or form of payment, the nature and extent of
services provided, or both. For example, a class that pays a front-end load
and a class with a rule 12b1 fee would be considered to have different
distribution arrangements because they differ in the amount, the form (by
shareholders individually versus by the class as a whole), and timing (at
purchase versus over time) of distribution charges.

Paragraph (a)(1)(ii) also provides that certain other expenses may be
allocated to an individual class. Thus, under paragraph (a)(1), funds would
have to determine whether each expense should be allocated to the fund as a
whole (a fund expense) or to each class individually (a class expense). 34
Expenses may be treated as expenses of a class if they are directly related to
the arrangement of that class for shareholder services or distribution, or if
they are actually incurred in a different amount pro rata. Paragraph
(a)(1)(ii) expressly provides that a fund may not allocate advisory or
custodial fees or other expenses related to management of the fund's assets.
Class allocations would have to be approved by the board of directors
following the procedures specified in paragraph (c).

 34The orders do this through two conditions. First, each class bears a
separate fee for its separate distribution or service arrangement. Second, the
orders permit certain specified fund expenses to be allocated at different
rates for each class. See, e.g., Goldman Sachs Equity Portfolios, Inc.,
Investment Company Act Release Nos. 19241 (Jan. 26, 1993), 58 FR 6830, 6834
(Notice of Application) and 19309 (Mar. 3, 1993), 53 SEC Docket 2308 (Order)
(conditions 1 and 7).

Some expenses may not always be classified automatically as fund expenses or
class expenses. In their applications, funds have treated in varied fashion
expenses for services that are available to all classes but are used more by
one class than another. For example transfer agency services are available to
all shareholders but arguably may be used more by some classes than others.
Some funds have requested exemptions to allocate transfer agency fees on a
class basis, while others have allocated them to all shareholders pro rata.
35 Funds also have sought to allocate on a class basis expenses such as
printing and postage related to preparing and distributing shareholder
reports, prospectuses, and proxies of a specific class, administrative
expenses and services required to support the shareholders of a class, and
directors' fees incurred as a result of issues relating to one class of
shares. 36 Other funds, however, have not requested that they be able to
allocate these expenses on a class basis. 37 This variation may relate, in
part, to tax considerations. 38

 35Compare Kidder Peabody California Tax Exempt Money Fund, Investment
Company Act Release Nos. 19226 (Jan. 22, 1993), 58 FR 6545 (Notice of
Application) and 19269 (Feb. 17, 1993) 53 SEC Docket 1558 (Order) (class
expenses include transfer agency fees), with Goldman Sachs, supra note 34, 58
FR at 6834 (class expenses do not include transfer agency fees).

 36Other expenses that sometimes are treated as class expenses include blue
sky registration fees incurred by a class, Securities Act registration fees
incurred by a class, and litigation or other legal expenses relating solely to
a class. See, e.g., Dreyfus A Bonds Plus, Inc., Investment Company Act Release
Nos. 19165 (Dec. 18, 1992), 57 FR 61944 (Notice of Application) and 19214
(Jan. 14, 1993), 53 SEC Docket 518 (Order).

 37See, e.g., Declaration Funds, Investment Company Act Release Nos. 19172
(Dec. 21, 1993), 57 FR 61942 (Notice of Application), 19218 (Jan. 19, 1993),
53 SEC Docket 554 (Order), and 19218A (Feb. 22, 1993), 53 SEC Docket 1527
(Amended Order) (requesting exemption to allocate only plan fees).

 38Funds are required to allocate most of their expenses other than rule
12b1 fees and transfer agency fees on a pro rata basis without regard to
class in order to avoid the issuance of a "preferential dividend'' and the
consequent loss of pass-through tax treatment under Subchapter M of the
Internal Revenue Code. The Internal Revenue Service has allowed funds to
allocate varying de minimis class expenses. See, e.g., IRS Private Letter
Rulings No. 9234005 (May 11, 1992) (expenses for class shareholder meeting
expenses and printing and postage costs for distributing prospectuses,
shareholder reports, and proxies to current class shareholders), and No.
9336009 (June 4, 1993) (permitting differences in transfer agency fees,
printing and postage expenses, SEC and state registration fees, litigation and
other legal expenses related solely to one class, and certain fees and
expenses of directors).

Paragraph (a)(1) would not create a bright-line test to classify expenses or
provide a list of permissible and impermissible class expenses. Instead, under
that provision, it would be appropriate to treat some expenses as class
expenses or not depending on the relation to the arrangement of a class or the
actual extent to which expenses are incurred in different amounts. The
existence of any actual difference would depend on whether, for example,
certain services are provided to one class to a different degree than to other
classes. These determinations would be left to the board of directors making
the findings required under paragraph (c).

The Commission requests comment on whether rule 18f3 should provide more
specific limits on differential allocation of expenses. One alternative would
be to limit such allocation to rule 12b1 fees, shareholder servicing fees,
and transfer agency expenses. Commenters are asked to address whether
establishing a brighter line between class expenses and general fund expenses
would be desirable, or whether it would, instead, interfere with fair
allocation of expenses among classes. Commenters are encouraged to supply
examples of expenses that properly should be classified as class expenses.

Proposed paragraph (a)(2) would require that each class bear all expenses of
its arrangement except to the extent of any waiver or reimbursement. Paragraph
(a)(2) addresses only expenses that are charged as the costs of those
arrangements; it would not prohibit the other party to a contract or other
arrangement from providing its goods or services at a reduced rate or free of
charge. Moreover, paragraph (a)(2) expressly provides for waiver or
reimbursement of class expenses by the fund's adviser or underwriter. 39
Because paragraph (a)(2) only provides for waiver of the class expenses of an
individual class, the amount of any such waiver or reimbursement may not
exceed the amount of those expenses. 40 Any waiver or reimbursement beyond
those expenses must be allocated pro rata among the classes based on their
relative net asset values.

 39Cf. Bearing of Distribution Expenses by Mutual Funds, Investment Company
Act Release No. 11414 (Oct. 28, 1980), 45 FR 73898 (adoption of rule 12b1)
(to the extent that an adviser's profits are "legitimate'' and "not
excessive,'' the adviser's payments for distribution expenses are not an
indirect use of fund assets).

 40This provision addresses only a waiver or reimbursement for a specific
class. It does not address waivers or reimbursements that apply to all classes
in the same proportion as the relative net asset value of each class or that
cap the expenses of each class at the same percentage of net assets.

The rule does not provide an exemption from section 18 for different waivers
or reimbursements of fund expenses, such as investment advisory fees. The
Commission believes that it would not be appropriate for an adviser to waiver
its advisory fees for one class and not for other classes.

b. Class voting. So that voting in multiple class funds is consistent with the
purposes of section 18(i), proposed paragraph (a)(3) would require that each
class have the exclusive right to approve matters submitted to shareholders
that relate solely to its different arrangement. Paragraph (a)(3) would govern
which class of shareholders would vote on a matter, but would not affect
whether the matter is one required to be submitted to shareholders. For
example, if the board of directors decided to adopt a shareholder services
plan for one class of shareholders that was not subject to rule 12b1, a
shareholder vote to approve that plan would not be required. 41 If, however,
the board of directors decided that the fund should submit the matter for
shareholder approval, paragraph (a)(3) would require that the matter be
submitted only to the class of shareholders subject to the plan.

 41The Commission has stated that "[w]hether particular shareholder or other
services are `primarily intended to result in the sale of fund shares' and
therefore, must be paid under a 12b1 plan, will depend on the surrounding
circumstances.'' Payment Asset-Based Sales Loads by Registered Open-End
Management Investment Companies, Investment Company Act Release No. 16431 at
n. 126 (June 13, 1988), 53 FR 23258, 23271 (proposing amendments to rule
12b1).

Proposed paragraph (a)(4) would require that each class have the right to vote
separately on matters in which its interests are different from those of other
classes. For the most part, classes are likely to have different interests
only in matters that involve the arrangements of the classes under paragraph
(a)(1) and hence fall within paragraph (a)(3). However, should a matter arise
that does not involve those arrangements, paragraph (a)(4) would ensure that
each class has a separate vote. Like paragraph (a)(3), paragraph (a)(4) would
govern all shareholder votes that are subject to it, but would not affect
whether or not a shareholder vote is required.

c. Fund-wide rights and obligations. The multiple class exemptive orders
require that all classes in a multiple class fund be identical except for
differences expressly permitted by order. Similarly, proposed paragraph (a)(5)
would require that a fund relying on the rule establish the same rights and
obligations for all shareholders regardless of class, except as provided by
paragraphs (a)(1), (2), (3), and (4). Thus, paragraph (a)(5) effectively would
require multiple class funds to allocate all expenses of the fund that are not
class expenses, and voting rights on matters that affect all shareholders
equally, to all fund shareholders pro rata. 42

 42Allocation of expenses to all shareholders pro rata generally means
allocation on the basis of relative net asset value. See infra section II.A.2.
Pro rata allocation of voting rights generally means allocation on a per share
basis but can also mean allocation on the basis of relative net asset value.
See Sentinel Group Funds, Inc. (pub. avail. Oct. 27, 1992) (voting rights of
different series in a fund may be tied to relative net asset values of each
class to avoid vesting unfair voting power in classes with per share net asset
values that are significantly lower than those of other classes). The
Commission requests comment whether rule 18f3 should require voting to be
allocated on the basis of relative net asset value.

2. Allocation of Fund-Wide Expenses

Proposed paragraph (b) would apply the general principle of paragraph (a)(5)
specifically to the allocation of fund expenses. Paragraph (b) would provide
that all income, gains and losses, and expenses of the fund 43 other than
class expenses, must be allocated to each class on the basis of relative net
asset value. This provision is intended to clarify an issue that has arisen
under some exemptive applications. The exemptive orders have required the
filing of a separate report from an expert in response to sub-item 77P of Form
NSAR. 44 In these reports, an expert has reported on the adequacy of
accounting procedures unique to multiple class funds. The reports have stated
whether the methodology and procedures for calculating net asset value of each
class, including allocation of income, expenses, dividends, and distributions,
are appropriate. In these reports, some applicants have proposed to allocate
fund expenses and income on a per share basis, regardless of class, but this
treatment has not been permitted. Such an approach is not appropriate and
would not be permitted under paragraph (b).

 43As is clear from the definition of "company'' in the introductory
paragraph of the rule, in the case of a fund with more than one series of
securities, the "income, realized and unrealized capital gains and losses, and
expenses of the company'' and the "net asset value of the company'' in
paragraph (a)(5) refer to the specific series in question.

 4417 CFR 274.101.

Under these proposals a separate report from an expert would no longer be
necessary. Instead, to assure that the registrant's internal control structure
is adequate to perform the accounting procedures unique to multiple class
funds, the Commission is proposing to amend sub-item 77B of Form NSAR to
state a requirement that accountants preparing the report on internal control
refer expressly to the procedures for calculating the classes' net asset
values. Sub-item 77B requires independent accountants to report on the
company's system of internal accounting control (internal control structure).
The report is to be based on the review, study and evaluation of the
accounting system, internal accounting controls, and procedures for
safeguarding securities made during the audit of the financial statements. The
proposed amendment would add a specific reference in the accountant's report
on internal control (structure) directed to the procedures for calculating
multiple equity class net assets. While an audit of the financial statements
would include a review of the accounting system, which would likely include an
evaluation of such procedure, specifying that the independent accountant's
report must include a reference should ensure a uniform level of responses.

3. Board Review

The multiple class exemptive orders 45 address potential conflicts of
interest among classes by looking to fund boards of directors. 46 The
Commission's orders include conditions requiring the boards to approve the
issuance of multiple classes and to include in the minutes of their meetings a
detailed discussion of the reasons for approval; to review and approve the
specific allocations of class expenses; and to monitor for any conflicts of
interest among classes and take any actions reasonably necessary to eliminate
them. 47

 45E.g., Smith Barney, supra note 6, 57 FR at 47159.

 46The definition of "director'' in section 2(a)(12) of the Investment
Company Act also includes any persons performing similar functions for any
organization, whether incorporated or unincorporated, including any natural
person serving as trustee of a management investment company created as a
common-law trust. 15 U.S.C. 80a2(a)(12).

 47E.g., Dreyfus, supra note 36, 57 FR at 61948. In addition, the orders
typically have required the independent directors to approve quarterly and
annual expense reports presented to the board under rule 12b1(b)(3)(ii), have
referenced the board's fiduciary responsibilities under the Investment Company
Act and, when bank intermediaries are involved, under federal banking laws
have required funds to develop written guidelines for the directors setting
forth the conditions of the orders and the duties and responsibilities of the
boards for the use of multiple classes. E.g., id. (conditions 4, 6, 7, 9, and
14).

Like the exemptive orders, proposed rule 18f3 would give boards of directors,
particularly the independent directors, significant responsibility. Proposed
paragraph (c) would require that the fund adopt a written plan specifying all
of the differences among classes. The plan would have to set forth the
different shareholder service and distribution arrangements for each class,
any allocation of other expenses, and any conversion features or exchange
privileges. Thus, the plan would provide the board of directors with a clear
statement of the differences among the classes.

Paragraph (c) also would require that the board, including a majority of the
independent directors, approve the plan before the issuance of multiple
classes and annually thereafter. 48 In doing so, it would have to find that
the plan is fair to, and in the best interests of, each class and the company
as a whole. 49 Thus, the rule would replace several board reviews required
by the orders with one finding that the written plan be fair to, and in the
best interests of, each class individually and the fund. In making this
finding, the board should focus on the relationship among the classes and
examine potential conflicts of interest among classes regarding allocation of
fees, services, and voting rights. Most significantly, the board should
evaluate the level of services provided to each class and the cost of those
services to ensure that the services are appropriate and that the allocation
of expenses is reasonable. 50

 48The Commission has taken a number of steps recently to reduce burdens on
fund boards of directors. E.g., Exemption of Acquisition of Securities Issued
by Persons Engaged in Securities-Related Businesses, Investment Company Act
Release No. 19716 (Sept. 16, 1993), 58 FR 49425 (amending rule 12d31 [17 CFR
270.12d31]); and Revision of Certain Annual Review Requirements of Investment
Company Boards of Directors, Investment Company Act Release No. 19719 (Sept.
17, 1993), 58 FR 49919 (amending rules 10f3, 17a7, 17e1, 17f4, and 22c1
[17 CFR 270.10f3, .17a7, .17e1, .17f4, and .22c1]). The Commission
believes that boards are most effective when they are evaluating potential
conflicts between funds and their advisers, not when they are involved with
day-to-day activities of funds or are making findings that involve more ritual
than substance. Because of the conflict between funds and their advisers over
advisory and other fees, the Investment Company Act places a great deal of
responsibility on boards to evaluate fees paid to advisers and their
affiliated persons. See, e.g., Investment Company Act section 15(a),(c), 15
U.S.C. 80a15 (a), (c). Multiple class arrangements involve potential
conflicts over fees. Therefore, the Commission believes that board review of
multiple class arrangements is appropriate.

 49Section 36(b) of the Act, 15 U.S.C. 80a35(b), imposes a fiduciary duty
on fund investment advisers and their affiliated persons as to their receipt
of compensation from the fund. That section does not contemplate multiple
class funds. The Commission believes, however, that a determination of whether
class-specific compensation (such as a rule 12b1 fee) paid to a fund's
investment adviser or an affiliated person of the adviser meets the standards
of that section should be made on a class-by-class basis, and would depend on
all the facts and circumstances, including the fees paid by other classes of
the fund, and the effect of any waiver or reimbursement.

 50In this regard, rule 12b1 requires board review of expenditures under
plans of distribution. Such review could be performed concurrently with the
review of the multiple class plan.

Proposed amendments to Forms N1A and N14 would require a copy of the rule
18f3 plan to be filed as an exhibit. 51

 51New Item 24(b)(18) of form N1A, and new Item 16, Exhibit (17) of Form
N14.

4. Exchange Privileges and Conversions

In addition to the differences among classes provided under paragraph (a), the
exemptive orders have allowed classes to differ in exchange privileges and
conversion features. Proposed paragraph (d) would codify these provisions of
the orders. Paragraph (d)(1) would let multiple class funds offer different
exchange privileges to different classes. Proposed paragraph (d)(2) would
allow funds to offer one or more classes with conversion features. This
provision would specify that conversions must be made at net asset value and
prescribe that a conversion feature must limit the total rule 12b1 fees paid
by shareholders with a conversion feature. Differences in exchange privileges
and conversion features would be subject to board review and approval under
paragraph (c) to determine that they are fair to each class individually and
to the fund as a whole. In addition, the exchange privileges continue to be
subject to section 11 of the Investment Company Act and the rules thereunder.
52

 5215 U.S.C. 80a11(a); 17 CFR 270.11a1, 2, and 3 (requiring offers of
exchange to be made on the basis of net asset value, with exceptions).

If a fund has a class with a conversion feature ("purchase class''), proposed
paragraph (a)(4) would require that any material increase in the rule 12b1
fee charged to the class into which the purchase class converts (the "target
class'') also be approved by a separate vote of the purchase class. If the
target class approves the increase but the purchase class does not, paragraph
(d)(2) would provide that the fund could not increase the rule 12b1 fee of
the target class unless it established a separate target class for
shareholders in the purchase class. That separate class would have to have the
same fees and terms as the target class did before the increase.

B. Rule 12b1

Rule 12b1 was adopted in 1980 before the issuance of any orders permitting
multiple class funds. The wording of the rule implicitly assumes that a fund
has a single class of securities and does not specify how its procedures apply
when the fund includes separate classes.

The Commission is proposing to amend rule 12b1 by adding new paragraph (g),
which would provide that if a plan covers more than one class of shares, the
provisions of the plan must be severable for each class, and any action that
is taken on the plan must be taken separately for each class. 53 Thus, a
plan would be subject to separate requirements of director and shareholder
approval for each class. Thus, in determining under paragraph (e) that a
distribution plan presents a "reasonable likelihood of benefit'' to the
company and its shareholders, the board would be required to make that finding
separately for each class. Similarly, where rule 12b1 requires that a plan
for the distribution of securities be approved by a majority of the fund's
outstanding voting securities, the proposed amendment would require
shareholder approval by the outstanding voting securities of each separate
class only. 54 The amendment is consistent with the orders, which have not
allowed shareholders not subject to a plan to vote on it.

 53In the case of funds issuing more than one series of shares, rule 12b1
has been interpreted to treat each series as a separate fund. See Inv. Co. Act
Rel. 16431, supra note 41, at n.202 and accompanying text.

 54As noted in the text above, under paragraph (d)(2) of proposed rule
18f3, however, any shareholder vote on the rule 12b1 plan of a target class
also would require a separate vote of any purchase class. Proposed new
paragraph (g) of rule 12b1 would contain an express cross-reference to rule
18f3 to address this limited exception expressly.

The amendment also would be consistent with paragraph (a)(3) of proposed rule
18f3. That provision requires that each class have exclusive voting rights on
any matter submitted to shareholders that relates solely to the shareholder
servicing or distribution arrangement of that class. 55

 55The orders also have required that multiple class funds adopt and operate
their shareholder service plans in accordance with the procedures set forth in
rule 12b1 (b) through (f), other than the rule's requirements for shareholder
approval. Rule 18f3 would not retain this requirement, in light of the
requirement under paragraph (c) that a multiple class fund's board review the
fairness of the fund's plan.

C. Disclosure

1. Prospectus Disclosure

Current exemptive orders generally require every prospectus of a multiple
class fund to disclose the respective expenses, performance, distribution
arrangements, services, fees, sales charges, and exchange privileges of all
classes, regardless of whether each class is offered through that prospectus.
56 This cross-disclosure requirement is intended to highlight the existence
of the different classes and provide information about investors' choices
among those classes. The orders, however, do not expressly require information
to be disclosed with equal prominence for all classes. Therefore, practice
varies. Some prospectuses provide expenses for one class in the fee table and
for other classes in notes following the fee table, and other prospectuses put
disclosure about other classes in the text further back in the prospectus.

 56E.g., Merrill Lynch California Municipal Series Trust, et al., Investment
Company Act Release Nos. 16503 (July 28, 1988), 53 FR 29294 (Notice of
Application) and 16535 (Aug. 23, 1988), 41 SEC Docket 955 (Order).

Some orders have included an exception from the cross-disclosure requirement
for classes of shares that are available solely to institutional investors
investing for their own account, institutional intermediaries that have
investment discretion over each underlying account, and certain persons
related to the fund, its adviser, or principal underwriter ("institutional or
inside investors''). 57 Under these orders, prospectuses for classes
available to the general public must disclose only the identity of the class
not available for purchase and identify those persons eligible to participate
in them. This approach recognizes that certain classes are not available to
the general public, either through direct investment or by exercising
investment discretion through an intermediary such as a bank or an employee
benefit plan. Detailed information concerning these classes may have little
relevance to an individual investor's evaluation of the class best suited to
his or her investment needs, and may confuse rather than inform investors.

 57E.g., John Hancock Asset Allocation Fund, Investment Company Act Release
Nos. 18921 (Sept. 1, 1992), 57 FR 40934 (Notice of Application) and 18984
(Sept. 29, 1992), 52 SEC Docket 2575 (Order) (disclosure not required about
class offered solely to certain unaffiliated benefit plans in which investment
discretion is vested with a separate trustee (excluding self-directed plans),
tax-exempt retirement plans for employees of the fund's adviser and its
affiliates, certain unit investment trusts, banks and insurance companies
purchasing for their own account, investment companies not affiliated with the
adviser, and endowment funds of non-profit organizations); Shearson Lehman
Appreciation Fund Inc., Investment Company Act Release Nos. 18770 (June 11,
1992), 57 FR 27830 (Notice of Application) and 18832 (July 7, 1992), 51 SEC
Docket 2021 (Order) (disclosure not required about class offered solely to,
among others, employees of the fund's principal underwriter and its
affiliates, directors, general partners, or trustees of any investment company
for which the principal underwriter serves as distributor, and the spouses and
minor children of the foregoing).

As noted above, funds may use the master-feeder structure to achieve many of
the same marketing objectives as the multiple class structure. Unlike multiple
class funds, however, which generally must disclose the material features of
each class regardless of how that class is marketed, feeder funds currently
are not required to provide detailed prospectus disclosure concerning other
feeder funds investing in the same master fund. Each feeder fund prospectus
must contain only a statement that other feeder funds invest in the master
fund and that their expenses and consequently their performance may differ,
and a toll-free telephone number for information about the availability of
other feeder funds. 58

 58Letter from Carolyn B. Lewis, Assistant Director, Division of Investment
Management, SEC, to Registrants (Feb. 22, 1993) (hereinafter "1993 Generic
Comment Letter''), Comment II.H: feeder fund prospectuses also must contain:
(i) Certain information regarding the master fund (e.g., its investment
objectives and policies), (ii) a unified fee table summarizing the fees of
both the master fund and the feeder fund, (iii) a discussion of certain
factors, including whether the aggregate fees assessed at the master fund and
feeder fund levels would be more or less than if the feeder fund invested
directly in the securities held by the master fund, that the feeder fund's
directors considered when adopting the master-feeder structure, (iv) a
discussion of the pass-through voting procedures followed by the feeder fund
when the master fund requests a vote of its security holders, and (v) a
discussion of the consequences of a feeder fund's being required to redeem its
shares in the master fund in the event that the feeder fund's shareholders
fail to approve a change in the feeder fund's investment objectives that
conforms with changes in the master fund's investment objectives. These
prospectus disclosure requirements closely resemble the standards recently
adopted by the North American Securities Administrators Association for
registration of master-feeder funds at the state level. See "Guidelines for
the Registration of Master Fund/Feeder Funds,'' NASAA Reports (CCH) 2252.

The Commission is proposing to modify the prospectus disclosure requirements
for multiple class funds and master-feeder funds to make them generally
consistent and to promote understanding of investors' options among these
funds' sales and service arrangements. The proposal seeks to respond to
concerns that the complexity of sales and service charges may confuse many
investors; some reports indicate that many investors may not understand that
they are paying sales or related charges or the effect different sales and
related charges will have on performance. 59 These concerns are greatest
with rule 12b1 fees and contingent deferred sales charges, whose significance
may not be fully appreciated by investors because they are not paid at the
time of purchase and because the amounts that investors ultimately will pay
cannot be determined precisely at that time.

 59Several news reports have indicated that the complexity of distribution
charge options can be confusing to investors. See, e.g., Carole Gould,
Clearing Up Confusion Over Class, N.Y. Times, Nov. 14, 1993, at F14; Gene
Colter, In ABCs of Shares, "B'' is for Beware, Wall St. J., Oct. 5, 1993, at
R22 (spread loads in particular may confuse investors, who may believe that
they are holding no-load funds); Robert N. Veres, Alphabet Soup, Worth,
July/August 1993, at 88 (the array of classes and distribution charges "can
bewilder even brokers and financial advisors''); Carole Gould, Looking Ahead,
Long and Hard, N.Y. Times, June 6, 1993, at F16 (the multiple class fund can
create a "byzantine pricing structure'' that confuses investors); Allen
Myerson, No Front or Back Fees But Watch That Middle, N.Y. Times, May 29,
1993, at D31 (investors baffled by the level load); Amey Stone, Will
Supermarket-Style Pricing Work With Mutual Funds, Financial Planning, Feb.
1993, at 37 (president of complex describes level load as designed to look or
feel nothing like a load); Amy Dunkin, Mastering the Maze of Fund Loads and
Fees, Bus. Wk., Aug. 24, 1992, at 78 ("Figuring out what impact the sales
charges and expenses have on your return is getting more difficult'').

Thus, the proposed amendments would require the prospectuses of both multiple
class and feeder funds to include a prominent legend following the fee table
providing information about the availability of other classes or feeder funds,
unless all classes or feeder funds are offered through the same prospectus. A
prospectus for a multiple class or feeder fund would be required to include
full cross-disclosure about all classes or feeder funds investing in the same
master fund that are offered or made available through the same broker,
dealer, bank, or other financial intermediary and that permit investors to
choose among alternative arrangements for sales and related charges. For
example, classes with a "dual distribution'' arrangement (a choice between a
class with a front-end load and a class with a spread load) would be subject
to this requirement. If a prospectus offers more than one class or feeder
fund, or contains cross-disclosure about other classes or feeder funds, the
prospectus would be required to discuss the differences among the classes or
feeder funds that are offered in the prospectus or subject to the
cross-disclosure requirement; that discussion would be required to include a
line graph comparing the hypothetical performance of those classes or feeder
funds over a ten year period, assuming a $10,000 initial investment and a 5%
annual return for all classes or feeder funds before expenses; this graph
would show the circumstances in which each would produce the highest total
return upon redemption. Thus, when investors are offered alternative sales and
related charges, the proposed prospectus requirements should focus investor
attention on a comparison of sales and service charge options and make it
easier to understand when a given option is likely to produce the lowest costs
and hence the highest return. These amendments would apply to all multiple
class funds, no matter whether they rely on rule 18f3 or continue to rely on
exemptive orders for their exemption from section 18. 60

 60For example, an Investment Company Institute committee has been
considering proposed standard nomenclature for multiple class funds. See 1993
ICI Securities Law Procedures Conference at V5.

The proposed amendments would not provide the only prospectus disclosure
requirements for these funds. Certain other disclosure requirements applicable
to master-feeder funds would remain in effect notwithstanding the proposal or
adoption of these amendments. 61 The proposed amendments, however, would not
include certain other disclosure currently required for multiple class funds
under the exemptions. 62 The Commission requests comment on whether other
amendments are necessary to address differences among multiple class,
master-feeder, and single class funds. For example, should the Commission
impose standardized class designations (e.g., Class A for front-end sales
charges, Class B for spread loads, etc.) upon all multiple class funds, or
would variations in class structures make such a requirement unworkable?

 61Thus, the Division's guidelines in the 1993 Generic Comment Letter for
feeder fund prospectus disclosure would continue to apply with one exception:
following the adoption of these amendments, the Division would no longer
require a general description of the master-feeder structure on the cover
page. See 1993 Generic Comment Letter, supra note 58 (Comment II.H.(a)).

 62For example, when multiple class funds provide the net asset value or
public offering price of any class for publication in a newspaper or similar
listing, the exemptions have required the funds to provide this information
for all classes. The Commission is not proposing such a requirement here.

 a. Legend concerning classes or feeder funds not offered through a
prospectus. The Commission is proposing to revise Instruction  1  to  Item 
2(a)  of  Form N1A 63 to require every prospectus of a multiple class or
feeder fund to include a prominent legend in the narrative following the fee
table unless all classes or all feeder funds are offered through the same
prospectus. 64 The legend would state that a multiple class fund issues
other classes or that other feeder funds invest in the master fund, and that
because sales charges and expenses vary among classes and feeder funds,
performance also varies. The legend would be required to identify those other
classes 65 or feeder funds, and to include a toll-free telephone number that
investors could use to obtain further information about other classes or
feeder funds not offered through the prospectus. As under the exemptive
orders, in multiple class fund prospectuses, the legend also would be required
to state that a sales representative may receive different compensation for
selling one class than for another class.

 6317 CFR 239.15A, 274.11A.

 64Rule 8b12(d) under the Act requires the body of all printed registration
statements to be in roman type at least as large as 10 point modern type. 17
CFR 270.8b12(d). The legend would be required to appear in the text and
therefore must be printed in at least 10 point modern type. Disclosure is
"prominent'' if it appears in a typographically distinctive manner (e.g.,
boldface, italics, red letters, etc.). See 1993 Generic Comment Letter, supra
note 58 (Comment II.J.).

 65Thus, the legend would provide for multiple class funds some of the
disclosure required by Item 6(d) of Form N1A, which requires identification
of other classes in the prospectus and a statement whether those classes have
any preference over the security being offered.

Proposed new Item 32(d) of Form N1A would require an undertaking to provide
investors calling the toll-free telephone number with information about
purchasing procedures and eligibility requirements for each class or feeder
fund, and comparable information to be provided about any investment vehicle
other than a mutual fund that invests only in the same master fund. 66 The
undertaking would also require funds to provide prospectuses for other classes
or feeder funds upon request.

 66A pension fund, bank collective trust fund or other commingled fund, as
well as another public or private investment vehicle also could invest in a
master fund.

The proposed legend requirement is intended to alert investors to the
existence of other classes and feeder funds and how to obtain information
about them. Thus, it would substitute for the more extensive information about
other classes that now is required under the exemptive orders to appear in the
prospectus. 67 Current disclosure requirements for most feeder funds would
be unchanged under the proposal, except that the proposal would require
specifically that some of the disclosure now required for feeder fund
prospectuses be presented in the legend following the fee table. 68

 67See supra note 56 and accompanying text: prospectuses generally are
required to provide cross-disclosure about expenses, performance, distribution
arrangements, services, fees, sales charges, and exchange privileges of
classes other than institutional or inside investor classes. Prospectuses for
classes offered to the general public are not required, however, to provide
that cross-disclosure about institutional or inside investor classes; instead,
they are required only to identify the institutional or inside investor class
and the category of investors eligible to purchase that class. See supra note
57 and accompanying text (defining institutional and inside investors).
Because, however, the proposed legend would be more conspicuous than the
disclosure of the existence of the institutional or inside investor class
provided by many multiple class funds under the exemptive orders, investors
should be more likely to notice it. Currently, many multiple class funds place
this disclosure at the end of the prospectus.

 68In general, the substance of the legend, including the inclusion of a
telephone number that investors may use to obtain further information, closely
resembles a current feeder fund prospectus disclosure requirement. See 1993
Generic Comment Letter, supra note 58 (Comment II.H.(c)).

The Commission requests comment on whether, instead of requiring that the
legend identify all other classes or feeder funds, the Commission should amend
Item 6(d) (which already requires identification of all classes) to require
identification also of all feeder funds, and require the legend to include a
cross-reference to the Item 6(d) disclosure.

b. Cross-disclosure about certain other classes or feeder funds. Proposed new
General Instruction I to Form N1A would require a prospectus offering any
class or feeder fund to provide disclosure responding to Items 2 through 9 of
Form N1A for all other classes or feeder funds investing in the same master
fund that are offered or made available through the same broker, dealer, bank,
or other financial intermediary 69 and have alternative arrangements for
sales and related charges, whether or not those classes or feeder funds are
offered in the same prospectus. This requirement would ensure that investors
have available the information necessary for choosing among different sales
charges and related expenses while investing in the same underlying portfolio.
The principal purpose of the proposed cross-disclosure requirement, coupled
with proposed new Item 6(h) discussed below, is to focus the attention of
investors on a comparison among different forms and/or amounts of sales
charges and related expenses. This arrangement would facilitate comparisons
among classes or feeder funds that have alternative arrangements for sales and
related charges by providing information in a readily accessible format. When,
as under Items 2 and 3 of Form N1A, information is required to be presented
in tabular form, those tables must list separately in parallel and adjacent
columns data for each class or feeder fund that is offered in the prospectus
or about which cross-disclosure is required.

 69Other financial intermediaries would be any other entities that, like
brokers or dealers, act as agents or principals in the sale of a fund's
shares, or that, like certain banks, provide shareholder services under an
agreement with a fund.

The determination of whether classes or feeder funds have alternative
arrangements for sales and related charges and therefore require
cross-disclosure would depend on the facts and circumstances of each
situation. Generally, classes or feeder funds would be considered to have
alternative sales and related charges if they differ primarily in offering
investors different methods for paying distribution costs (e.g., a choice
among a front-end load, a spread load, and a level load). 70 By contrast, a
class or feeder fund offered exclusively to institutional or inside investors
71 would not be considered to have an alternative arrangement to a class or
feeder fund offered to the general public. The typical case to which this
requirement would apply is a dual distribution arrangement. 72

 70As an illustration of the proposed requirement, assume a fund offers four
classes, with Class A and Class B sold to retail investors through brokers,
Class C available only to institutions investing for their own account, and
Class D available through banks to retail investors. Class A has a 5.0%
front-end sales load and a .25% asset-based service fee, Class B has a .75%
asset-based distribution fee and a 5.0% CDSL that declines 1.0% per year,
Class C has no sales charges or asset-based distribution fees, and Class D has
no sales charge but a .75% asset-based distribution fee and a .25% asset-based
service fee. A prospectus for Class A must contain full cross-disclosure about
Class B, and vice versa. Prospectuses for Classes A and B would not be
required to include cross-disclosure about Classes C and D. Although Class D
shares also are offered to retail investors, Class D is available only to
customers of a financial intermediary that does not offer Classes A and B to
its customers; therefore, cross-disclosure about Class D would not be
required. Furthermore, if Classes A and B were each available only through a
separate bank, the prospectus for each class would not be required to provide
cross-disclosure about the other.

 71See supra note 57 and accompanying text.

 72See, e.g., Merrill Lynch California Municipal Bond Trust, supra note 56.

Under proposed new General Instruction I and the proposed legend requirement,
an investor's existing or potential relationship to a broker, dealer, bank, or
other financial intermediary would determine whether the investor would find
information about various classes or feeder funds in the same prospectus or
would be referred to a toll-free telephone number for that information. If
classes or feeder funds are sold to customers of the same financial
intermediary and differ primarily in the sales charge arrangements,
cross-disclosure would be required; the cross-disclosure requirement, together
with the requirement of a discussion of differences among classes or feeder
funds, would focus investor attention on the differences among sales charges
and related expenses.

If classes or feeder funds are sold to customers of different financial
intermediaries, or if they are sold to customers of the same intermediary but
differ primarily in the services provided, the proposal assumes that they are
being offered to investors with different existing or potential customer
relationships. Those different relationships would involve different
conditions and charges that generally would not be required to be disclosed in
the prospectus in any event. 73 Thus, an investor would need to look outside
the prospectus to learn about other customer relationships and to establish
such a relationship in order to purchase certain classes or feeder funds.
Because prospectuses currently are not required to disclose all of the costs
and terms of establishing and maintaining these relationships and investing in
these classes or feeder funds (and such disclosure, if required, would be
lengthy, complex and constantly changing), the Commission is proposing to
provide for investors to obtain those classes or feeder funds by calling the
toll-free number listed in the legend following the fee table.

 73For example, the prospectus would not be required to disclose all the
terms and costs of specific customer relationships or transactions with
particular financial intermediaries such as brokers or banks. Disclosure is
not always required about the amount of transaction fees or ongoing fees, such
as account fees, that are charged by financial intermediaries. See, e.g., Form
N1A, Items 7(b)(v) and 8(b). Item 7(b)(v) requires disclosure whether any
person such as a broker-dealer or bank may impose any charges in connection
with purchases, unless a registrant believes those charges are disclosed in a
wrapper. Item 8(b) requires disclosure whether a broker-dealer may impose
charges for selling shares to a registrant through the broker-dealer. In
either case, the amount of such fees need not be disclosed. When banks or
other financial institutions impose service fees, a footnote should be added
to the fee table to inform investors that such fees exist; and when there is
only one institution levying an additional fee, that fee may have to be
included as an item in the fee table. Letter from Carolyn B. Lewis, Assistant
Director, Division of Investment Management, SEC, to Registrants at 4 (Jan.
17, 1992) (Comment II.C).

The cross-disclosure requirement should result in minimal change for current
multiple class and master-feeder funds. The multiple class exemptive orders
already require cross-disclosure of virtually all the features that are likely
to differ among classes; current disclosure, however, may not be as extensive
or in the same format as what would be required under the proposal. For
example, in prospectuses of funds operating under current exemptive orders,
sales charge and expense disclosure may be found in footnotes or the text and
not in parallel columns in the fee table; under the proposed new Instruction,
such disclosure would be required to appear in the same form and extent as if
the class or feeder were being offered in the same prospectus. In any event,
virtually all funds with classes that would be subject to the cross-disclosure
requirement already offer those classes in the same prospectus. Although
feeder fund prospectuses have been required only to provide disclosure about
both the feeder funds and the master fund, 74 few feeder funds currently
have alternative arrangements for sales charges that would bring them within
the proposed cross-disclosure requirement. 75

 74See "Hub-And-Spoke'' Funds: A Report Prepared By the Division of
Investment Management at n. 22 (report delivered to The Honorable John D.
Dingell on April 15, 1992). The master fund is a co-issuer with each feeder
fund under Securities Act rule 140. The master fund and its officers and
directors sign each feeder fund's registration statement. 17 CFR 230.140.

 75See supra note 27 and accompanying text for examples of feeder funds
investing in the same master fund that are offered or made available through
the same intermediaries and have alternative sales charge arrangements; such
funds would appear to be subject to the proposed cross-disclosure requirement.

The Commission requests comment on whether it is appropriate to limit the
proposed cross-disclosure requirement to classes or feeder funds with
alternative sales charge arrangements. Should prospectuses be required instead
to provide cross-disclosure about all classes or feeder funds investing in the
same portfolio, or all such classes or feeder funds other than those offered
to institutional or inside investors, 76 or all classes or feeder funds
offered or made available through the same financial intermediary? Such a
requirement arguably might help investors understand all their possible
options for investing in a portfolio, and might promote greater competition
among different financial intermediaries. Would, however, such a requirement
result in mandatory prospectus disclosure so complex that it would defeat the
Commission's goal of promoting investor understanding?

 76See supra note 57 and accompanying text (defining institutional and
inside investors). The rationale for this alternative would be that when one
class or feeder fund is offered through a broker, and another class or feeder
fund is made available through a bank, investors would be eligible in theory
to purchase each class or feeder fund, either through the broker or by opening
an account with the bank, and hence should receive information in the
prospectus about those other choices.

c. Comparison of classes or feeder funds. If a prospectus offers two or more
classes or feeder funds, or provides cross-disclosure about one or more
classes or feeder funds, proposed new Item 6(h) would require the prospectus
to discuss the differences among the classes or feeder funds that are offered
in the prospectus or about which the prospectus provides cross-disclosure
under General Instruction I. It also would require the prospectus to provide a
line graph comparing the performance of those classes or feeder funds over a
hypothetical ten-year period. Like the line graph required under Item 5A, the
graph would compare the net asset value on the first day of the first year to
the subsequent net asset values at redemption on the last day of each year
starting with a $10,000 initial investment; unlike the graph under Item 5A,
this graph would be hypothetical and not based on historical performance. 77
The graph would show, for example, the circumstances under which holding
shares of a class or feeder fund for a given length of time would produce the
highest return; with this comparison, investors could consider how long they
are likely to hold their shares in determining which class or feeder fund to
purchase. 78

 77The proposed Instructions to new Item 6(h) also are based on the
Instructions to Item 5A; they have been modified to reflect the differences
between historical and hypothetical performance, and between a comparison to
an index and a comparison among different classes or feeder funds. Unlike Item
5A disclosure, Item 6(h) disclosure would be required to appear in the
prospectus; it would not be sufficient to include this disclosure in a fund's
annual report.

 78Cf. Vanessa O'Connell, Mastering the ABCs of Fund Shares, Money, Sept.
1993, at 44 (providing hypothetical example in which level-load class would
have the highest value if an investor stays in the fund for five or fewer
years, spread load would have the highest value for an investor redeeming in
year six, and front-end shares for an investor holding for seven years or
longer).

The computation of those net asset value figures would use a five percent
annual return before expenses for all classes or feeder funds. This five
percent rate like that under the example in Item 2, is used to ensure
comparability and illustrate the hypothetical nature of the line graph. The
Commission requests comment on whether Item 6(h) would require more than one
rate of return in order to illustrate differences among different market
conditions, 79 or should permit the use of a rate other than five percent
selected by the issuer so long as the rate is reasonable in comparison to the
historical performance of the fund or other funds with comparable investment
objectives. The Commission also requests comment on whether Item 6(h) should
require textual discussion instead of the proposed line graph.

 79For example, prospectuses for variable life insurance contracts include
tables showing how contract values can change over time at hypothetical gross
investment rates of zero, four, and eight percent, or zero, six, and twelve
percent. Cf. also Regulation SK, Item 402(c), 17 CFR 229.402(c) (executive
compensation disclosure instructions regarding stock options require valuation
of options assuming five or ten percent annual rate of stock price
appreciation).

The graph would be required to be accompanied by a brief statement explaining
that the graph is a hypothetical illustration of the effect on performance of
the expenses of the different classes or feeder funds. The statement also must
explain the graph's assumptions and state that the assumed five percent return
should not serve as a basis for predicting future returns.

The line graph would complement the example in the fee table required by Item
2: The example requires disclosure of total expenses over periods of one,
three, five, and ten years; thus it may not identify the point at which one
class or feeder fund would come to have a higher value on redemption than
another class or feeder fund. When a prospectus includes the disclosure
required by proposed Item 6(h), the legend following the fee table also would
be required to include a cross-reference to the location of the Item 6(h)
disclosure in the prospectus. The Commission requests comment on whether this
disclosure should be required to follow the fee table.

d. Alternative regulatory approaches. The Commission requests comment on
whether prospectus disclosure requirements alone are effective to ensure that
investors understand their options among these funds' sales and related
charges before making an investment decision. Various reports suggest that
many investors find these funds complicated, and do not understand what sales
charges they will be paying; 80 these reports raise questions whether
adequate information about sales charges is communicated to investors today.

 80See supra note 59 (for references to press reports).

The Commission requests comment on whether these reports of investor confusion
are accurate. If so, is it likely that the recently effective amendments to
the National Association of Securities Dealers, Inc. ("NASD'') Rules of Fair
Practice regarding asset-based sales charges will lessen investor confusion?
81

 81NASD Rules of Fair Practice, Article III, Section 26, NASD Manual (CCH) 
2176. Among other changes, these amendments preclude the use of the term
no-load and similar terms for funds with rule 12b1 or service fees exceeding
0.25%.

The Commission also requests comment on whether some other regulatory approach
is necessary to address these concerns. Should the Commission require multiple
class and master-feeder funds to deliver a prospectus or some shorter document
before sale? 82 For example, representatives might provide an off-the-page
prospectus (if available) or some other document containing information about
sales charges and a comparison such as that required by proposed Item
6(h)\83\. Or should the Commission work with the NASD to set standards for
basic information that representatives must communicate to customers, whether
orally or in writing, before investment in multiple class and master-feeder
funds?

 82But see Protecting Investors, supra note 2, at 351 (recommending that
delivery of the section 10(a) prospectus should not be required before all
mutual fund sales in the absence of evidence that investors are dissatisfied
with, or being harmed by, the current practice of requiring the delivery of
the statutory prospectus at the earlier of the confirmation of the sale or the
delivery of the security in the case of mutual fund shares sold through
brokers).

 83For example, such a document might consist of photocopies of pertinent
pages of the section 10(a) prospectus. As with rule 15c28 [17 CFR
240.15c281], the Commission could adopt such a rule under the authority in
section 15(c)(2) of the Securities Exchange Act [15 U.S.C. 78o(c)(2)], which
provides the Commission with rulemaking authority over fraudulent, deceptive,
and manipulative acts and practices.

2. Advertising and Sales Literature

Multiple class orders generally require advertising and sales literature to
include expense and performance data for all classes of shares whenever they
provide this information for any one class. 84 This requirement addresses
concerns that advertising and sales literature featuring the performance of
only one class might be misleading. Investors, for example, could be misled if
the performance of a class available only to institutions were advertised
without disclosure that classes available to the general public would have
higher sales charges and expenses and, consequently, poorer performance.

 84 E.g., Merrill Lynch California Municipal Bond Trust, supra note 56, 53
FR 29294.

The same orders that do not require prospectus disclosure about institutional
or inside classes also permit a comparable exception in advertising and sales
literature disclosure. Under this exception, advertising or sales literature
need not include performance or expense data for classes that are available
solely to institutional or inside investors. 85 Moreover, the orders do not
explicitly require any information regarding the multiple class structure to
be included in advertisements or sales literature that do not contain
performance or expense data. For master-feeder funds, there are currently no
Commission guidelines or requirements regarding advertising and sales
literature.

 85See supra note 57 and accompanying text. In contrast to their
requirements for prospectus disclosure, however, the exemptions do not require
any disclosure in advertising or sales literature regarding the excepted
classes.

a. Legends concerning other classes or feeder funds. The Commission proposes
to amend rule 134 under the Securities Act by adding new paragraph (a)(3)(iv)
to specifically address multiple class and master-feeder fund advertising and
sales literature. 86 Because master-feeder arrangements serve many of the
same functions as multiple class funds and raise many of the same concerns,
the Commission believes that, as with prospectus disclosure, advertising for
both types of funds should be subject to similar requirements. 87 Proposed
new paragraph (a)(3)(iv) would require multiple class and master-feeder funds
to include a legend in advertising and sales literature similar to the
proposed legend following the fee table in the prospectus. The legend would
disclose that a multiple class fund issues other classes or that other feeder
funds invest in the master fund, and that because sales charges and expenses
vary among classes and feeder funds, performance also varies. 88 Unlike the
prospectus legend, the advertising legend would not be required to list the
names of other classes or feeder funds. In addition, the legend would include
a toll-free telephone number that investors may use to obtain further
information concerning other classes or feeder funds not featured in the
advertising or sales literature. The proposal would require that the legend by
in a type at least as large as, and of a style different from, but at least as
prominent as, that used in the major portion of the advertisement. 89 These
format requirements are intended to prevent the legend from being placed in a
footnote or in any other inconspicuous location that might not draw investor
attention. The legend would not be required that advertising or sales
literature includes all classes of a fund or all feeder funds that invest in a
master fund.

 8617 CFR 230.134. Existing paragraph (a)(3)(iv) would be renumbered as
paragraph (a)(3)(v). Rule 134 permits advertising and sales literature with
content strictly limited to certain items set forth in paragraph (a)(3)(ii) of
the rule. Rule 134 does not provide for the use of performance figures.

 87See supra section II.C.1.

 88The Commission is proposing to require that the legend discuss expenses
and performance even though rule 134 does not provide for the use of
performance data such as yield and total return figures; rule 134
advertisements, however, may include rankings based on performance data.

 89This standard is the same as that required by paragraph (a)(3)(iii) for
legends in mutual fund print advertisements and sales literature. 17 CFR
230.134(a)(3)(iii).

Proposed new paragraph (a)(8) of rule 482 would require a legend similar to
the legend proposed for rule 134. 90 The Commission also is proposing to add
a legend requirement for sales literature subject to rule 34b1 under the
Investment Company Act. 91 Proposed new paragraph (b)(1)(iii) of rule 34b1
would require sales literature used by multiple class or feeder funds that
contains performance figures for fewer than all classes of a fund or all
feeder funds that invest in the same master fund to include the legend
required by proposed new paragraph (a)(8) of rule 482.

 9017 CFR 230.482.

 9117 CFR 270.34b1. Rule 34b1 generally requires any pamphlet, circular,
or other sales literature that contains investment company performance data to
comply with certain of the disclosure requirements of rule 482.

b. Performance information. Proposed new paragraph (a)(9) of rule 482 would
require multiple class and masterfeeder fund advertising that contains
performance figures to include, with equal prominence, the performance of all
classes and feeder funds that are subject to the prospectus cross-disclosure
requirement. 92 Thus, for multiple class funds, the proposal would require
generally less extensive expense and performance information than the
exemptions do at present. The equal prominence requirement is intended to
address the concern that advertisements or sales literature might disclose the
performance of some classes inconspicuously, e.g., in a footnote or in print
much smaller than that used for the performance figures of another class. The
Commission requests comment, however, on whether the requirement of equal
prominence may result in unduly bulky performance disclosure that might
emphasize performance data at the expense of other disclosure or might inhibit
the disclosure of performance data. Should the Commission instead require
performance information to be presented in a table? Would the proposed legend
(discussed above) be sufficient to inform investors of the fund's capital
structure, the possible availability of classes or feeder funds not otherwise
mentioned in the advertising or sales literature and a means of obtaining
further information? The Commission also requests comment on whether rules
134, 482, and 34b1 should require funds to disclose with equal prominence
performance or expense data for all classes or feeder funds except classes or
feeder funds offered exclusively to institutional or inside investors 93 to
the extent that performance or expense data for any class or feeder fund are
included in that advertising or sales literature.

 92Proposed new paragraph (b)(1)(iii) of rule 34b1 would extend this
requirement to sales literature.

 93See supra note 57 and accompanying text (defining institutional and
inside investors).

Under Securities Act rule 482 and Investment Company Act rule 34b1,
advertisements or sales literature containing performance data for open-end
investment companies other than money market funds must include one, five, and
ten year average annual total return. 94 When an advertisement or sales
literature contains performance data for a class or feeder fund with a shorter
performance history than other classes or feeder funds, the advertisement or
sales literature might be misleading if it did not include long-term
performance data; for example, short-term disclosure alone might be misleading
if the performance were excellent in the short-term, but poor over the longer
term. The exemptive orders generally require disclosure of the performance of
all classes. 95

 9417 CFR 230.482(e)(3), 270.34b1. An important purpose for requiring the
presentation of long-term average annual return quotations in advertising or
sales literature that contains performance figures is to provide investors
with information on the fund's performance over the business cycle. See, e.g.,
Advertising By Investment Companies; Proposed Rules and Amendments to Rules,
Forms, and Guidelines, Securities Act Release No. 6660 (Sept. 7, 1986), 51 FR
34384, 34386.

 95Supra note 56 and accompanying text. Cf. Merrill Lynch Asset Management,
Inc. (pub. avail. Mar. 9, 1990) (fund permitted to advertise performance for a
new class since sales of the new class commenced, rather than restating the
fund's historical performance data for that class; because investors would
have available the performance of the older class, they "in no way would be
denied information about the long-term performance of the Fund'').

The proposed additional proviso for paragraph (e)(3) of rule 482 would require
long-term total return information to be provided for another class or another
feeder fund or the master fund when that information is not available for the
class or feeder fund advertised. The proviso would require that when an
advertisement contains performance figures for a class or feeder fund for
which average annual total return information is available for less than the
one, five, and ten year periods required by paragraph (e)(3), and this
information is available for a longer period for another class, feeder fund,
or master fund, then the advertisement must include quotations of average
annual total return for the securities of the other class or feeder fund or
master fund together with any necessary explanation. 96 This requirement is
intended to ensure that funds do not attempt to hide poor past performance by
creating a new class. Funds must select the class or feeder fund or master
fund with performance figures for the longest period if none has been offered
for ten years or more. If more than one class or feeder fund or master fund
has been offered for ten years or more, then the fund may select a class or
feeder fund or master fund from this group. 97 When presenting performance
figures for a class or feeder fund or master fund, funds must be careful to
include any additional information necessary to ensure that such performance
data are not misleading; 98 For example, they should disclose the effect of
differences in sales charges or other expenses. The Commission requests
comment on whether rule 482 instead should be amended to provide that, when
complete long-term total return information is not available for a class or
feeder fund, the advertisement must include long-term total return figures
that incorporate the performance of another class or the master fund, adjusted
to reflect applicable sales loads and account fees. 99 The Commission also
requests comment on whether issues of long-term performance data for multiple
class and master-feeder funds should continue to be treated interpretively
under the general requirements of rule 482, instead of under the specific
amendment proposed here.

 96Proposed new paragraph (b)(1)(iii) of rule 34b1 would extend this
requirement to sales literature.

 97In the case of classes or feeder funds with alternative sales charge
arrangements, this provision may not have much effect, because the performance
of all such classes would be required to appear in the same advertisement.

 98See, e.g., Sec. Act Rel. 6660, supra note 94, 51 FR 34384, 34391 (whoever
sponsors an advertisement or sales literature, whether the fund, the
underwriter, or the dealer, bears the primary responsibility for assuring that
the advertisement or sales literature is not false or misleading). Cf. Kidder
Peabody Equity Income Fund, Inc. (pub. avail. Nov. 1, 1991) (when a fund
changed from a CDSL with a 1.0% 12b1 fee to a front-end load with a 0.5%
12b1 fee, historical performance data must be based on rule 12b1 fees
actually charged and may not be recalculated to reflect the changed 12b1
fee); Investment Company Institute (pub. avail. May 13, 1988) (a fund must
adjust performance data to reflect its current sales load for each of the one,
five, and ten year periods under rule 482).

 99See The Managers Core Trust (pub. avail. Jan. 28, 1993) (when an existing
fund becomes a master fund, the new feeder fund may restate the historical
performance data of the master fund to reflect any applicable sales loads and
account fees at the feeder fund).

3. Off-the-Page Prospectuses

The Commission recently proposed amendments to rule 482 to permit open-end
management investment companies to use advertisements containing applications
to purchase their securities ("off-the-page prospectuses''). 100 Proposed
paragraph (g)(1)(v), however, would prohibit the use of off-the-page
prospectuses by multiple class and master-feeder funds. The proposing release
stated that these types of funds would not be eligible to use off-the-page
prospectuses because of the complexity of the disclosure that would be
necessary to comply with the proposed amendments. The proposing release also
stated that the Commission would later consider whether multiple class and
master-feeder funds should be able to use off-the-page prospectuses. 101
Although a few commenters agreed that multiple class and master-feeder funds
should not be eligible to use off-the-page prospectuses, 102 most commenters
argued that these types of funds would not require extraordinary disclosure
103 and that the disclosure required under the exemptions could fit in an
off-the-page prospectus without confusion. 104

 100See Off-the-Page Prospectuses for Open-End Management Investment
Companies, Securities Act Release No. 6982 (Mar. 5, 1993), 58 FR 16141.

 101Id., 58 FR at 16144.

 102See Letter from North American Securities Administrators Association to
Jonathan G. Katz, Secretary, SEC (June 23, 1993), File No. S71193; Letter
from Savings & Community Bankers of America to Jonathan G. Katz, Secretary,
SEC (July 21, 1993), File No. S71193.

 103See, e.g., Letter from American Bar Association to Jonathan G. Katz,
Secretary, SEC (June 23, 1993), File No. S71193.

 104See, e.g., Letter from the Investment Company Institute to Jonathan G.
Katz, Secretary, SEC (June 23, 1993), File No. S71193; Letter from the
Vanguard Group of Investment Companies to Jonathan G. Katz, Secretary, SEC
(June 23, 1993), File No. S71193.

In light of these comments and the other changes to rule 482 proposed in this
release, the Commission is proposing to revise proposed rule 482(g) to delete
the provision excluding multiple class funds and feeder funds from eligibility
to use off-the-page prospectuses. A new General Instruction to paragraph
(g)(2) would require cross-disclosure for all classes or feeder funds that are
subject to the prospectus cross-disclosure requirement. Like other
advertisements under rule 482, off-the-page prospectuses also would be subject
to the legend requirement of proposed paragraph (a)(8). In addition,
off-the-page prospectuses would be required to include the discussion and line
graph required under proposed new Item 6(h) of Form N1A concerning
differences among classes or feeder funds. The Commission requests comment on
whether any other disclosure requirements are necessary to address the
specific features of these types of funds.

III. Cost/Benefit of Proposed Action

Taken as a whole, proposed rule 18f3 and the proposed rule and form
amendments should not impose greater burdens of reporting or recordkeeping or
greater regulatory compliance costs than those imposed by the multiple class
exemptive orders; and the proposed disclosure requirements also should impose
little burden on feeder funds. Under proposed rule 18f3, multiple class funds
would be subject to fewer requirements and lower costs than under the
exemptive orders. Any additional time required to comply with proposed rule
18f3's written plan requirement should be minimal because multiple class
funds already would have to commit any material class differences to writing
in order to enter into distribution or service agreements, or to disclose
their terms. The proposed amendment to rule 12b1 should not impose any
additional costs because it essentially would incorporate in the rule existing
requirements in the exemptive orders for multiple class funds.

The proposed amendment to Form NSAR would merely articulate what good
accounting practice should already dictate and would be less burdensome than
the condition in the multiple class exemptive orders requiring that multiple
class funds file a separate expert's report on internal control relating to
fund procedures for calculating each class's net assets. The proposed legend
and cross-disclosure requirements should impose little burden, because they
essentially would involve only disclosure that already exists in other
disclosure documents. Any burden of this disclosure would be outweighed by the
benefits of more informed investment decisions.

IV. Summary of Initial Regulatory Flexibility Analysis

The Commission has prepared an Initial Regulatory Flexibility Analysis in
accordance with 5 U.S.C. 603 regarding proposed rule 18f3 and the proposed
amendments to rules 12b1 and 34b1 under the Investment Company Act, to rules
134 and 482 under the Securities Act, and to Forms N1A, N14, and NSAR. The
analysis explains that the proposals are intended to allow mutual funds to
issue multiple classes of shares without the burden of obtaining individual
exemptive orders. The disclosure proposals are intended to minimize investor
confusion and focus investor attention on differences in sales charges and
related expenses; the disclosure proposals also are intended to clarify and
consolidate disclosure and reporting requirements for multiple class and
master-feeder funds, including small entities. The Analysis states that the
Commission considered significant alternatives to the proposal, including
establishing different compliance or reporting requirements, and exempting
small entities from the rule 18f3 plan and the disclosure requirements. The
Commission concluded that the alternatives would remove little, if any,
burden, while removing significant investor protections. To obtain a copy of
the Initial Regulatory Flexibility Analysis, write to Roseanne Harford,
Division of Investment Management, Mail Stop 106, Securities and Exchange
Commission, 450 Fifth Street, NW., Washington, DC 20549.

V. Statutory Authority

The Commission is proposing rule 18f3 under the authority granted to the
Commission in section 6(c), 18(i), and 38(a) of the Investment Company Act [15
U.S.C. 6(c), 18(i), and 37(a)], and the amendment to rule 12b1 under section
12(b) of the Investment Company Act [15 U.S.C.  12(b)]. The Commission is
proposing the amendment to Form NSAR under sections 30 and 38(b) of the
Investment Company Act [15 U.S.C. 80a29, and 37(b)], the amendments to Form
N1A under sections 6, 7(a), 10, and 19(a) of the Securities Act [15 U.S.C.
77g(a), 77j, and 77s(a)], and sections 8(b), 24(a), and 38(a) of the
Investment Company Act [15 U.S.C. 80a8(b), 24(a), and 37(a)]. The amendments
to rule 482 are proposed under sections 10(b) and 19(a) of the Securities Act
[15 U.S.C. 77j(b) and 77s(a)]. The amendment to rule 34b1 is proposed under
section 38(a) of the Investment Company Act [15 U.S.C. 37(a)].

VI. Text of Proposed Rule and Rule and Form Amendments

List of Subjects in 17 CFR Parts 230, 239, 270, and 274

Investment companies, Reporting and record keeping requirements, Securities.

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

PART 230 GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

1. The authority citation for part 230 continues to read, in part, as follows:

Authority: The Securities Act of 1933, 15 U.S.C. 77b, 77f, 77g, 77h, 77j, 77s,
77sss, 78c, 78l, 78m, 78n, 78o, 78w, 79ll(d), 79t, 80a8, 80a29, 80a30, and
80a37, unless otherwise noted.

                                  * * * * *

2. Section 230.134 is amended by redesignating paragraph (a)(3)(iv) as
paragraph (a)(3)(v) and adding paragraph (a)(3)(iv) to read as follows:

 230.134 Communications not deemed a prospectus.

(a) * * *

(3) * * *

(iv) in the case of a multiple class fund or a feeder fund (as defined in 
230.482(a)(8)), if a communication contains information regarding fewer than
all classes of shares of the same series or fewer than all feeder funds that
invest in the same master fund, and uses either legend required by paragraph
(a)(3)(iii) of this section, a legend disclosing: that the fund issues other
classes or that other feeder funds invest in the master fund, that because
sales charges and expenses vary among classes or feeder funds, performance
also varies, and a toll-free telephone number investors may use to obtain
information concerning other classes or feeder funds; provided that, if such
communication is printed, the legend shall be in a size type at least as large
as and of a style different from, but at least as prominent as, that used in
the major portion of the advertisement, and that if such communication is used
in a radio or television advertisement, the legend shall be given emphasis
equal to that used in the major portion of the advertisement.

                                  * * * * *

3. Section 230.482 is amended by adding paragraphs (a)(8) and (a)(9) preceding
the Note to read as follows:

 230.482 Advertising by an investment company as satisfying requirements of
section 10.

(a) * * *

(8) In the case of a multiple class fund or a feeder fund, unless it contains
performance data for all classes offered by a multiple class fund or all
feeder funds that invest in the same master fund, it includes a legend set in
a size type at least as large as and of a style different from, but at least
as prominent as, that used in the major portion of the advertisement that
discloses that the fund issues other classes or that other feeder funds may
invest in the master fund, that because sales charges and expenses vary among
classes or feeder funds, performance also varies, and a toll-free telephone
number investors may use to obtain information concerning other classes or
feeder funds. A "multiple class fund'' is an open-end management investment
company that issues more than one class of shares, each of which represents
interests in the same portfolio of securities, and either meets the
requirements of  270.18f3 of this chapter or operates pursuant to an
exemptive order. A "feeder fund'' is an open-end management investment
company, other than a periodic payment plan, that holds shares of a single
open-end management investment company (the "master fund'') as its only
investment securities.

(9) In the case of an advertisement containing performance data for any of two
or more classes of a multiple class fund or two or more feeder funds that
invest in the same master fund that are offered or made available through the
same broker, dealer, bank, or other financial intermediary and that have
alternative arrangements for sales and related charges, it includes
performance data for all such classes or feeder funds set forth with equal
prominence.

                                  * * * * *

4. Section 230.482 is amended by removing the word "and'' at the end of
paragraph (e)(3)(iv) and adding concluding text to read as follows:

 230.482 Advertising by an investment company as satisfying requirements of
section 10.

                                  * * * * *

(e) * * *

(3) * * *

(iv) * * *

and provided further, that if an advertisement is for securities of a class or
feeder fund for which average annual total return information is available for
less than the one, five, and ten year periods required by this paragraph, and
information for such longer period is available for another class or for the
master fund or another feeder fund that holds shares of the same master fund
as its only investment securities, any quotations of average annual total
return for the securities offered in the advertisement shall be accompanied by
quotations of average annual total return for a class or feeder fund or master
fund (which other average annual total return information need not be set out
with equal prominence) that has been offered for the longest time or for at
least ten years, together with any necessary explanation; and

                                  * * * * *

5. Section 230.482 is amended by amending paragraph (g), as proposed on March
19, 1993, in 58 FR 16149 (March 25, 1993), by adding the word "and'' following
the semicolon at the end of paragraph (g)(1)(iii), removing the semicolon and
the word "and'' at the end of paragraph (g)(1)(iv) and adding in its place a
period, removing paragraph (g)(1)(v), removing the word "and'' following the
semicolon at the end of paragraph (g)(2)(vi)(A), adding the word "and''
following the semicolon at the end of paragraph (g)(2)(vi)(B), adding
paragraph (g)(2)(vi)(C), removing the words "General Instruction'' following
paragraph (g)(2)(ix), adding in their place the words "General Instructions'',
redesignating the existing text in the General Instruction as General
Instruction 1, and adding General Instruction 2, to read as follows:

 230.482 Advertising by an investment company as satisfying requirements of
section 10.

                                  * * * * *

(g)* * *

(2)* * *

(vi)* * *

(C) In the case of a multiple class or feeder fund, a discussion of the
differences among all classes or all feeder funds holding shares of the same
master fund as their only investment securities that are offered through the
same section 10(a) prospectus or that are offered or made available through
the same broker, dealer, bank, or other financial intermediary and that have
alternative arrangements for sales and related charges; and a line graph
comparing the initial account value at the beginning of a hypothetical
ten-year period with the subsequent account values at the end of each of the
years (assuming a $10,000 investment in each class or feeder fund at the
beginning of the first year, redemption on the last day of each year, and a 5%
annual return before operating expenses for all such classes or feeder funds),
accompanied by a brief statement explaining that the graph is a hypothetical
illustration of the effect on performance, over a ten-year period, of the
expenses of the different classes or feeder funds, assuming a $10,000 initial
investment and a 5% return before expenses, and that the assumed 5% return
should not serve as a basis for predicting future returns.

                                  * * * * *

General Instructions

                                  * * * * *

2. In any advertisement for one or more classes of a multiple class fund or
one or more feeder funds investing in a master fund, provide information in
response to paragraphs (g)(2) (ii) through (ix) of this section for all
classes or all feeder funds investing in the same master fund that are offered
or made available through the same broker, dealer, bank, or other financial
intermediary and that have alternative arrangements for sales and related
charges.

                                  * * * * *

PART 270 RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940

6. The authority citation for part 270 continues to read, in part, as follows:

Authority: 15 U.S.C. 80a1, et seq., 80a37, 80a39 unless otherwise noted.

                                  * * * * *

7. Section 270.12b1 is amended by adding paragraph (g) to read as follows:

 270.12b1 Distribution of shares by registered open-end management
investment company.

                                  * * * * *

(g) If a plan covers more than one class of shares, the provisions of the plan
must be severable for each class, and whenever this section provides for any
action to be taken with respect to a plan, that action must be taken
separately for each class, provided, however, that under  270.18f3 any
shareholder vote on a plan of a target class must also require a vote of any
purchase class.

8. By adding  270.18f3 to read as follows:

 270.18f3 Multiple class companies.

Notwithstanding Sections 18(f)(1) and 18(i) of the Act, a registered open-end
management investment company or series or class thereof established in
accordance with Section 18(f)(2) of the Act whose shares are registered on
Form N1A [ 239.15A and 274.11A of this chapter] ("company'') may issue more
than one class of voting stock, provided that:

(a) Each class:

(1)(i) Must have a different arrangement for shareholder services or the
distribution of securities or both, and

(ii) May have a different allocation of other expenses, not including advisory
or custodial fees or other expenses related to the management of the company's
assets, that are:

(A) Directly related to that arrangement, or

(B) Actually incurred in a materially different amount for that class than for
other classes on the basis of the net asset value of that class in relation to
the net asset value of the company;

(2) Must bear all of its expenses under paragraph (a)(1) of this section,
except to the extent that the company's investment adviser or principal
underwriter may waive or reimburse those expenses;

(3) Must have exclusive voting rights on any matter submitted to shareholders
that relates solely to its arrangement;

(4) Must have separate voting rights on any matter submitted to shareholders
in which the interests of one class are different from the interests of any
other class; and

(5) Must have in all other respects the same rights and obligations as each
other class.

(b) Income, realized and unrealized capital gains and losses, and expenses of
the company not allocated to a particular class pursuant to paragraph (a) of
this section must be allocated to each class on the basis of the net asset
value of that class in relation to the net asset value of the company.

(c) Any payments made under paragraph (a) of this section must be made
pursuant to a written plan setting forth the separate arrangement and
allocation of each class, and any related conversion features or exchange
privileges. Before the issuance of any share of each class, at least annually
thereafter, and before any material amendment of a plan, the directors of the
company, and the directors who are not interested persons of the company, must
find that the plan, including the allocation of expenses, is fair to, and in
the best interests of, each class individually and the company as a whole. The
directors must request and evaluate, and any agreement relating to a class
arrangement must require the parties thereto to furnish, such information as
may be reasonably necessary to evaluate the plan.

(d) Nothing in this section prohibits a company from offering any class with:

(1) An exchange privilege whereby securities of the class may be exchanged for
securities of another company; or

(2) A conversion feature whereby shares of one class of the company (the
"purchase class'') will be exchanged automatically for shares of another class
of the company (the "target class'') after a specified period of time,
provided that:

(i) The conversion is effected on the basis of the relative net asset values
of the two classes without the imposition of any sales load, fee, or other
charge;

(ii) The payments authorized under a plan adopted pursuant to  270.12b1
("rule 12b1 plan'') for the target class are lower than the payments
authorized under a rule 12b1 plan for the purchase class; and

(iii) If the amount of payments authorized under a rule 12b1 plan for the
target class is increased materially without approval of the shareholders of
the purchase class, the fund will establish a new target class for the
purchase class on the same terms as applied to the target class before that
increase.

9. Section 270.34b1 is amended by removing the word "and'' at the end of
paragraph (b)(1)(i), removing the period and adding a semicolon in its place
at the end of paragraph (b)(1)(ii), and adding paragraph (b)(1)(iii) to read
as follows:

 270.34b1 Sales literature deemed to be misleading.

                                  * * * * *

(b)(1)* * *

(iii) In the case of a multiple class fund or a feeder fund (as defined in
paragraph (a)(8) of  230.482 of this chapter) the disclosure required by
paragraphs (a)(8) and (a)(9) of  230.482 of this chapter, unless such
performance data are included for all classes of a multiple class fund or all
feeder funds investing in the same master fund.

                                  * * * * *

PART 239 FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933

PART 274 FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940

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

Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77sss, 78c, 78l, 78m, 78n,
78o(d), 78w(a), 78ll(d), 79e, 79f, 79g, 79j, 79l, 79m, 79n, 79q, 79t, 80a8,
80a29, 80a30, and 80a37, unless otherwise noted.

                                  * * * * *

11. The authority citation for part 274 continues to read, in part, as
follows:

Authority: 15 U.S.C. 80a1, et seq., unless otherwise noted.

                                  * * * * *

Note: The following forms do not, and the amendments will not, appear in the
Code of Federal Regulations.

12. By adding General Instruction I to Form N1A [ 239.15A and 274.11A] to
read as follows:

Form N1A

                                  * * * * *

General Instructions

                                  * * * * *

I. Multiple Class and Master-Feeder Funds

In any registration statement on this Form for one or more classes of a
multiple class fund or one or more feeder funds investing in a master fund (as
defined in Securities Act rule 482(a)(8) [17 CFR 230.482(a)(8)], provide
information in response to Items 2 through 9 for all classes or all feeder
funds investing in the same master fund that are offered or made available
through the same broker, dealer, bank, or other financial intermediary and
that have alternative arrangements for sales and related charges.

13. By amending Form N1A [ 239.15A and 274.11A] by adding the following
sentence to the end of Instruction 1 to Item 2(a):

Form N1A

                                  * * * * *

Item 2. Synopsis

(a) * * *

General Instructions

(1) * * * If the Registrant has issued any class of shares of the same series
not offered through the prospectus, or if any feeder funds not offered through
the prospectus invest in the same master fund as the Registrant, include a
prominent statement in the narrative disclosing, as applicable (i) that the
fund issues other classes or that other feeder funds invest in the master
fund, (ii) the names or designations of those other classes or feeder funds,
(iii) that, because sales charges and expenses vary among classes and feeder
funds, performance also varies, and (iv) a toll-free telephone number
investors may use to obtain information concerning other classes or feeder
funds. If the prospectus includes the disclosure required by Item 6(h), state
the location in the prospectus of that disclosure. If the Registrant has
issued more than one class of shares, state that sales representatives may
receive different compensation for one class than for another class.

                                  * * * * *

14. By adding Item 6(h) to Form N1A ( 239.15A and 274.11A) to read as
follows:

Form N1A

                                  * * * * *

Item 6. Capital Stock and Other Securities

                                  * * * * *

(h) Discuss the differences among all classes or among all feeder funds
investing in the same master fund that are offered in the same prospectus or
about which the prospectus contains disclosure pursuant to General Instruction
I; and provide a line graph comparing the initial account value at the
beginning of a hypothetical ten-year period with the subsequent account values
at the end of each of the years, assuming a $10,000 investment in each class
or feeder fund at the beginning of the first year, redemption on the last day
of each year, and a 5% annual return before operating expenses for all such
classes or feeder funds. Immediately next to the graph, provide a brief
statement explaining that the graph is a hypothetical illustration of the
effect on performance, over a ten-year period, of the expenses of the
different classes or feeder funds, assuming a $10,000 initial investment and a
5% return before expenses, and that the assumed 5% return should not serve as
a basis for predicting future returns.

Instructions

In preparing the line graph comparison:

1. Computation:

a. Assume that the initial investment is made on the first day of the first
year at the public offering price stated in the prospectus.

b. Base subsequent account values on a 5% annual return for each class or
feeder fund before subtraction of operating expenses, assuming the operating
expenses stated in the fee table, adjusted to their actual level absent any
reimbursement or waiver.

c. If any class or feeder fund requires a minimum initial investment of more
than $10,000, base the line graph on initial investment of the highest minimum
amount.

d. If any class has a conversion feature, assume that shares are converted at
the time and on the terms disclosed in the prospectus.

2. Sales Load. Reflect any front-end sales load (or any other fee charged at
the time of purchasing shares) by beginning the line graph at the amount that
actually would be invested, i.e., a dollar amount below $10,000. Assume that
the maximum sales load (and other charges deducted from payments) is deducted
from the initial $10,000 investment. In the case of a class or feeder fund
that charges a deferred sales load (or other amounts at redemption or upon
closing of an account), assume the deduction of the maximum deferred sales
load (or other charges) that would be applicable for a complete redemption on
the last day of each year (i.e., assume redemption before any reduction in the
amount of any deferred sales load or other charges).

3. Dividends and Distributions. Assume all dividends and distributions by each
class or feeder fund are reinvested. If any sales load is charged upon
reinvestment of dividends and distributions, the brief statement next to the
graph must state that the graph does not include the effect of that sales load
on reinvestment.

4. Account Fees. Reflect all recurring fees that are charges to all accounts.

a. For any account fees that vary with the size of the account, assume a
$10,000 account size (unless using a higher initial investment according to
Instruction 1.c.).

b. If recurring fees charged to shareholder accounts are paid other than by
redemption of fund shares, they should be appropriately reflected.

5. Scale. Construct the axis of the graph measuring dollar amounts using a
linear scale.

                                  * * * * *

15. By amending Form N1A ( 239.15A and 274.11A) by adding paragraph (b)(18)
to Item 24 before the Instructions to read as follows:

Form N1A

                                  * * * * *

Item 24. Financial Statements and Exhibits

                                  * * * * *

(b) * * *

(18) copies of any plan entered into by Registrant pursuant to Rule 18f3
under the 1940 Act, and any agreement with any person relating to
implementation of such plan.

                                  * * * * *

16. By amending Form N1A ( 239.15A and 274.11A) by adding paragraph (d) to
Item 32 to read as follows:

Form N1A

                                  * * * * *

Item 32. Undertakings

                                  * * * * *

(d) If the legend described in instruction 1 to Item 2(a) requires the
inclusion in the prospectus of a legend containing a toll-free telephone
number, an undertaking to provide to persons calling that number information
about: any eligibility requirements for purchasing shares of each other class
or other feeder fund investing in the same master fund; the procedures for
investing in each such class or feeder fund; and in the case of a
master-feeder fund, comparable information for any other publicly offered
investment vehicle whose only investment securities are securities of the same
master fund; and an undertaking to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of
receipt of a written or oral request, any Prospectus or Statement of
Additional Information for those other classes, feeder funds, or other
investment vehicles.

                                  * * * * *

17. By amending Form N14 (17 CFR 239.23) by revising Items 5(a) and 16(10) to
read as follows:

Form N14

                                  * * * * *

Item 5. Information About the Registrant

                                  * * * * *

(a) if the registrant is an open-end management investment company, furnish
the information required by Items 3, 4(a) and (b), 5, 5A, 6(a), (c), (d), (e),
(f), (g), and (h), and 7 through 9 of Form N1A under the 1940 Act; provided,
however, that the information required by Item 5A may be omitted if the
prospectus is accompanied by an annual report to shareholders containing the
information otherwise required by Item 5A;

                                  * * * * *

Item 16. Exhibits

                                  * * * * *

(10) copies of any plan entered into by registrant pursuant to Rule 12b1
under the 1940 Act (17 CFR 270.12b1) and any agreements with any person
relating to implementation of the plan, and copies of any plan entered into by
Registrant pursuant to Rule 18f3 under the 1940 Act, and any agreement with
any person relating to implementation of the plan;

                                  * * * * *

18. By amending Form NSAR ( 274.101) by revising the first paragraph of
Sub-item 77B to read as follows:

Form NSAR

                                  * * * * *

General Instructions

                                  * * * * *

Instructions to Specific Items

Item 77: Attachments

                                  * * * * *

Sub-Item 77B: Accountant's report on internal control structure.

Except as provided below, a management investment company shall furnish a
report of its independent accountant on the company's system of accounting
controls. The accountant's report shall be based on the review, study, and
evaluation of the accounting system (including procedures for calculating
multiple equity class net assets), internal accounting controls and procedures
for safeguarding securities made during the audit of the financial statements.
The report should disclose material weaknesses in the accounting system
(including procedures for calculating multiple equity class net assets),
system of internal accounting control and procedures for safeguarding
securities, which exist as of the end of the registrant's fiscal year.
Disclosure of a material weakness should include an indication of any
corrective action taken or proposed.

                                  * * * * *

Dated: December 15, 1993.

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 9331161 Filed 122293; 8:45 am]

BILLING CODE 801001P
