| Fund Democracy |
Investment Company Institute
Publicly Available April 18, 1979
LETTER TO SEC
November 17, 1977
Roger D. Blanc
Chief Counsel
Division of Market Regulation
Securities and
Exchange Commission
Washington, D. C. 20549
Re: Rule 10b-10
Dear Mr. Blanc:
On behalf of the mutual fund industry, the Investment Company Institute* hereby requests interpretative advice with respect to Rule 10b-10 under the Securities Exchange Act of 1934, as adopted by the Commission on May 5, 1977. (Release Nos. 34-13508 and IC-9753).
FN* The Investment Company Institute is the national association of the American mutual fund industry. Its membership includes 434 open-end investment companies ('mutual funds'), their investment advisers and principal underwriters. Its mutual fund members account for over 90% of industry assets and have approximately eight million shareholders.
For many years, the mutual fund industry has been interested in the Commission's confirmation rules, particularly those provisions that relate to the use of quarterly confirmations for contractual and other systematic purchase plans. Indeed, historically, transaction statements sent to investors by mutual funds generally have contained more pertinent securities transaction information than required by the Commission's confirmation rules. Generally, such statements, which are known in the industry as historical account statements, rasemble the 'passbook' which an individual would receive from a savings bank or a savings and loan institution. These historical account statements, in conjunction with the mutual fund prospectus, have provided investors with extremely complete and detailed information concerning their transactions in mutual fund shares.
Mutual funds are unique insofar as they are in continuous registration. Investors purchasing mutual fund shares must have a current prospectus at or before the consummation of each sale. Mutual fund prospectuses, by definition, must contain detailed disclosure about all material facts concerning the securities offered therein. Form S-5 under the Securities Act of 1933 sets forth the requirements concerning the information which must be disclosed in mutual fund prospectuses. The Commission has published specific Guidelines for the Preparation of Form S-5. (Release No. 33-5259 and IC-7220; June 9, 1972). For example, Form S-5 provides that the outside front cover page of the prospectus must set forth the fund's sales charge expressed as a percentage of the public offering price per share and any charges made in connection with a redemption or repurchase of shares. Further, a detailed schedule of 'break point' sales charges, as well as the maximum dealer discount, must be set forth within the body of the prospectus. Thus, the mutual fund prospectus provides prospective investors with complete information regarding sales charges.
The Institute and its members carefully reviewed and commented upon Rule 10b- 10 when first proposed, Release No. 34-12806, and upon the recently proposed amendments thereto, Release No. 34-13661. The new rule and the proposed amendments appear to have been designed primarily to correct deficiencies in the disclosure contained in confirmations given to customers by brokers and dealers who purchase or sell exchange-listed or OTC-traded securities for, from, or to customers in what can be described as 'typical' brokerage transactions. While the proposed amendments to Rule 10b-10 set forth special requirements for certain periodic mutual fund transactions, it appears that mutual fund principal underwriters may also be subject to the general requirements of Rule 10b-10 insofar as they are registered brokers or dealers and act in either an agency or principal capacity.
Our request for interpretative advice concerns the disclosure required by Rule 10b-10 in connection with the sale of shares of open-end management investment companies which, as we noted above, are in continuous registration under the Securities Act of 1933. More specifically, we seek confirmation of our belief that the information required by Rule 10b-10 need not be separately set forth on a confirmation if it has already been disclosed to the mutual fund investor in the fund's prospectus.
The first paragraph of Rule 10b-10 states that:
"It shall be unlawful for any broker or dealer to effect for or with the account of a customer any transaction in . . . any security . . . unless such broker or dealer, at or before completion of such transaction, gives or sends to such customer written notification disclosing . . ."
With regard to the information that a confirmation must contain, the release adopting Rule 10b-10 states at footnote 41 that:
". . . [I]n the case of offerings registered under the Securities Act of 1933, the final prospectus delivered to the customer should generally set forth the information required by the proviso with respect to source and amount of remuneration . . . In such situations the information specified in the proviso need not be separately set forth on the confirmation." (emphasis added).
While these comments were made in the context of the disclosure required in the case of transactions effected as part of a 'special offering' or otherwise involving special selling efforts, we believe the same conclusion is appropriate in the case of transactions in mutual fund shares.
The language of Rule 10b-10 appears to clearly contemplate that the notification requirements can be satisfied by providing investors with two distinct documents which need not duplicate each other, i.e., the prospectus and the confirmation. Taken together, the prospectus and the mutual fund account statement provide investors with all of the information required by the rule.
Consequently, we believe that, as a general principle, the information disclosed to investors in a mutual fund's prospectus need not be separately set forth on confirmations sent to shareholders. We request the concurrence of the Division of Market Regulation in our interpretation of Rule 10b-10. We would be pleased to discuss our request with the staff or furnish any supplemental information that may be desired.
Sincerely,
Donald O'Connor
Vice President-Operations
SEC LETTER
March 19, 1979
Publicly Available April 18, 1979
Mr. Donald O'Connor
Vice President--Operations
Investment Company Institute
1775 K Street, N.W.
Washington, D. C. 20006
Dear Mr. O'Connor:
In your letter of November 17, 1977, you inquired 'on behalf of the mutual fund industry' whether Securities Exchange Act Rule 10b-10 requires disclosure on a confirmation of the amount of any remuneration received by a broker or dealer in connection with a transaction in a security, issued and offered by an open-end management investment company and registered pursuant to the Securities Act of 1933. I understand that your request pertains to transactions that may be effected on either an agency or principal basis, including transactions that are confirmed by means of a so-called 'historical account statement,' prepared and sent to the customer by the investment company or a service agent on behalf of the company's principal underwriter or other participating broker-dealer. [FN1] I further understand that your inquiry relates only to transactions for which the customer has received, at or before completion of the transaction, a current prospectus applicable to the securities being offered by the investment company.
FN1 See letter of Feb. 9, 1972 to Mr. Robert L. Augenblick from Allan S. Mostoff. End of FN.
Rule 10b-10 provides generally that it shall be unlawful for any broker or dealer to effect any transaction in a security for or with a customer unless the broker or dealer, at or before completion of the transaction, gives or sends to the customer written notification of various facts partinent to that transaction. If the broker-dealer is acting as agent for the customer (or for some other person or for both the customer and some other person), paragraph (a)(4)(ii) requires disclosure of:
the amount of any remuneration received or to be received by [the broker] from such customer in connection with the transaction . . .
and paragraph (a)(4)(iii) requires disclosure of:
the source and amount of any other remuneration received or to be received by [the broker] in connection with the transaction; Provided, however, That if, in the case of a purchase, the broker was not participating in a distribution, or in the case of sale, was not participating in a tender offer, the written notification may state whether any other remuneration has been or will be received and that the source and amount of such other remuneration will be furnished upon written request of such customer.
As you noted in your letter, the Commission has stated with respect to paragraph (a)(4)(iii):
in the case of offerings registered under the Securities Act of 1933, the final prospectus delivered to the customer should generally set forth the information required by the proviso with respect to source and amount of remuneration . . .. In such situations the information specified in the proviso need not be separately set forth on the confirmation. [FN2]
FN2 Securities Exchange Act Release No. 13508 (May 5, 1977) at n. 41. End of FN.
Also, paragraph (a)(5)(i) requires, in the case of principal transactions, disclosure of
The amount of any mark-up, mark-down, or similar remuneration received in a transaction in an equity security if [the dealer] is not a market maker in that security and if, after having received an order to buy from such customer, he purchased the security from another person to offset a contemporaneous sale to such customer or, after having received an order to sell from such customer, he sold the security to another person to offset a contemporaneous purchase from such customer . . ..
In your letter, you state, 'the mutual fund prospectus provides investors with complete information regarding sales charges.' I understand that the current prospectus requirements provide for prominent disclosure of the sales charge expressed as a percentage of the public offering price per share and any charges made in connection with a redemption or repurchase of shares. Furthermore, you note that a a detailed schedule of "break point' sales charges, as well as the maximum dealer discount' must be set forth in the body of the prospectus.
On the basis of the foregoing, we would not recommend enforcement action to the Commission under Rule 10b-10, if a customer's confirmation of a transaction in a security registered pursuant to the Securities Act of 1933 and issued by a registered open-end management investment company did not disclose the sales load or any other charges in connection with the transaction, provided that the customer had received, at or before completion of the transaction, a current prospectus applicable to the security that disclosed the precise amount of the sales load or other charges or a formula that would enable the customer to calculate the precise amount of those fees. Of course, if a broker-dealer received remuneration which was not disclosed in the prospectus in the manner described above, that remuneration would be required to be separately disclosed on a confirmation. This position is a staff position on enforcement action and does not purport to represent any legal conclusions concerning the issues presented in your letter. Furthermore, this position may be withdrawn pending any further study of confirmation disclosures for transactions in securities issued by open-end managment investment companies.
Sincerely,
Roger D. Blanc
Chief Counsel
Securities and Exchange Commission
This page was last updated on September 19, 2001.