Securities and Exchange Commission (“Commission”).
Notice of an application for an order under section 6(c) of the Investment Company Act of 1940 (the “Act”) for an exemption from section 22(d) of the Act, as well as certain disclosure requirements.
Summary of Application:
Edward D. Jones & Co., L.P. (“Edward Jones”) Start Printed Page 23263requests an order that would permit the sale of shares of certain registered open-end investment companies (“mutual funds”) at a price that reflects the elimination of the front-end sales load, in connection with a Deferred Consideration Agreement entered into by Edward Jones with the United States Attorney's Office for the Eastern District of Missouri. Edward Jones also requests that the relief extend to such mutual funds and their principal underwriters.
The application was filed on February 4, 2005, and amended on April 5, 2005.
Hearing or Notification of Hearing:
An order granting the application will be issued unless the Commission orders a hearing. Interested persons may request a hearing by writing to the Commission's Secretary and serving applicants with a copy of the request, personally or by mail. Hearing requests should be received by the Commission by 5:30 p.m. on May 24, 2005, and should be accompanied by proof of service on applicants, in the form of an affidavit, or for lawyers, a certificate of service. Hearing requests should state the nature of the writer's interest, the reason for the request, and the issues contested. Persons who wish to be notified of a hearing may request notification by writing to the Commission's Secretary.
Secretary, Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. Applicant, 12555 Manchester Road, St. Louis, MO 63131-3729.Start Further Info
FOR FURTHER INFORMATION CONTACT:
Bruce R. MacNeil, Senior Counsel, at (202) 551-6817, or Todd F. Kuehl, Branch Chief, at (202) 551-6821 (Division of Investment Management, Office of Investment Company Regulation).End Further Info End Preamble Start Supplemental Information
The following is a summary of the application. The complete application may be obtained for a fee at the Commission's Public Reference Branch, 450 Fifth Street, NW., Washington, DC 20549-0102 (telephone (202) 942-8090).
1. Edward Jones, a Missouri limited partnership, is registered as a broker-dealer under the Securities Exchange Act of 1934. Edward Jones is one of the largest sellers of brokerage-sold mutual funds in the United States and has selling agreements with approximately 240 mutual fund families.
2. On December 20, 2004, Edward Jones entered into a Deferred Consideration Agreement (“Agreement”) with the United States Attorney's Office for the Eastern District of Missouri (“Office”). The Agreement states that the Office investigated the conduct of Edward Jones relating to revenue sharing payments made by certain mutual funds that were designated as preferred funds (“Preferred Funds”). Among other things, Edward Jones acknowledged in the Agreement that it recommended the Preferred Funds to its customers and did not provide disclosure about the receipt of revenue sharing to its customers.
3. The Agreement provides that the Office will delay consideration of any actions stemming from the investigation for a period of two years in consideration of, among other things, Edward Jones offering all of its customers who owned shares of any Preferred Funds on December 31, 2004 (“Eligible Customers”) the opportunity, for a period of 90 days, to sell their interests in the Preferred Funds and purchase shares of any other mutual fund with which Edward Jones has a selling agreement (the “Switch Funds”) without the payment of a front-end sales load (the “Switch”). In connection with the Switch, the front-end sales load will either be waived by a Switch Fund's principal underwriter and Edward Jones (the “NAV Switch Funds”) or Edward Jones will rebate the front-end sales load back to the customer (the “Rebate Switch Funds”).
Applicant's Legal Analysis
1. Section 22(d) of the Act, in relevant part, prohibits any registered investment company, any principal underwriter and any dealer from selling a redeemable security except at a current public offering price described in the prospectus. Rule 22d-1 under the Act provides an exemption from section 22(d) allowing a mutual fund, its principal underwriter and dealers to sell shares at prices that reflect variations in, or elimination of, the sales load, if certain conditions are met. Rule 22d-1(a) requires that the mutual fund, its principal and dealer apply any scheduled variation uniformly to all offerees in the class specified. Rule 22d-1(b) requires the mutual fund to furnish to existing shareholders and prospective investors adequate information concerning any scheduled variation, as prescribed in applicable registration form requirements. Rule 22d-1(c) requires the mutual fund, before making any new sales load variation available to the purchasers of the fund's shares, to revise its registration statement to describe that new variation. Finally, rule 22d-1(d) requires the mutual fund to advise its existing shareholders of any new sales load variation within one year of the date when that variation is first made available to purchasers of the fund's shares.
2. Form N-1A is the registration statement used by mutual funds. Item 7(a)(2) of Form N-1A requires disclosure of waivers or variations of sales loads. Item 18(a) of Form N-1A requires additional disclosure of how a mutual fund's shares are offered to the public, including waivers or variations of sales loads.
3. Section 6(c) of the Act provides that the Commission may exempt any class of persons, securities or transactions, from any provision of the Act, if and to the extent that such exemption is necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of the Act.
4. Edward Jones requests an order pursuant to section 6(c) of the Act exempting it, the Switch Funds and their principal underwriters from section 22(d) of the Act to the extent necessary to implement the Switch, and exempting the Switch Funds from the requirements of Items 7(a)(2) and 18(a) of Form N-1A as they would apply to the elimination of the front-end sales load in connection with the Switch. Edward Jones states that the provisions of section 22(d) were intended to prevent disruption of orderly distribution by dealers selling shares at a discount and discrimination among investors resulting from different prices charged to different investors. Edward Jones states that the Switch does not implicate any of these concerns and that the requested relief meets the standards of section 6(c) of the Act.
5. Edward Jones states that it will ensure that the elimination of the front-end sales load in the Switch will be applied uniformly to all offerees in the class specified, as required by rule 22d-1(a). Edward Jones further states that each NAV Switch Fund will advise its existing shareholders of the front-end sales load elimination within one year of the Switch, as required by rule 22d-1(d). As a condition to the requested order, participation by an NAV Switch Fund in the Switch must receive prior approval of the NAV Switch Fund's board of directors, including a majority of the directors who are not interested persons. Edward Jones argues that compliance with the requirements of rule 22d-1(b) and (c) is unduly Start Printed Page 23264burdensome under the circumstances. Edward Jones states that it will notify all Eligible Customers in writing of their opportunity to participate in the Switch. In the notice to Eligible Customers, Edward Jones will disclose that the customer's purchase of Rebate Switch Funds may be more expensive to Edward Jones than their purchase of NAV Switch Funds, thus creating a conflict of interest. The notice also will identify those Switch Funds that are NAV Switch Funds and those that are Rebate Switch Funds.
Applicant agrees that any order granting the requested relief will be subject to the following conditions:
1. Prior to implementing the Switch, Applicant will obtain an undertaking in writing from each of the NAV Switch Funds that the NAV Switch Fund will comply with Rule 22d-1(d) under the Act with respect to the Switch.
2. Prior to an NAV Switch Fund's participating in the Free Switch, the board of directors or trustees of the NAV Switch Fund (“Board”), including a majority of the Board members who are not “interested persons,” as defined in Section 2(a)(19) of the Act, will review any sales load waiver proposed to be made by the NAV Switch Fund or its principal underwriter in connection with the Switch to determine whether the waiver is in the best interest of the NAV Switch Fund and its shareholders. To assist the Board in making this determination, the NAV Switch Fund's principal underwriter will provide the Board with such information as may reasonably be necessary to enable the Board to make an informed decision. The factors considered and the basis for the Board's determination will be reflected in the Board's minutes, which will be preserved for a period of not less than six years from the date of the NAV Switch Fund's participation in the Switch, the first two years in an easily accessible place.Start Signature
For the Commission, by the Division of Investment Management, under delegated authority.
Margaret H. McFarland,
1. The term NAV Switch Funds also includes any Switch Funds whose principal underwriters make a “full dealer reallowance” of the front-end sales load amount to Edward Jones.Back to Citation
[FR Doc. E5-2167 Filed 5-3-05; 8:45 am]
BILLING CODE 8010-01-P