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90-56 Proposed Amendments to Subsections (b) "Definitions" and (d) ("Sales Charge Rule") of Article III, Section 26 of the NASD Rules of Fair Practice Re: Regulation By the NASD of Mutual Fund Asset-Based Sales Charges; Last Voting

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MAIL VOTE

EXECUTIVE SUMMARY

The NASD invites members to vote on proposed amendments to the NASD mutual fund maximum sales charge rule that would subject asset-based sales charges to the provisions of the rule. The last voting date is October 5, 1990. The text of the amendments follows this notice.

BACKGROUND

In Notice to Members 90-26 (April 16, 1990), the NASD distributed for comment proposed amendments to subsections (b) and (d) of Article III, Section 26 of the NASD Rules of Fair Practice. If adopted, they would subject asset-based sales charges of mutual funds to the provisions of the NASD's maximum sales charge rule. Currently, the rule governs only front-end and deferred sales charges.

Fifty-eight comment letters were received from members and other interested persons. Twenty-five of the commenters were not in favor of the adoption of the amendments. The remainder, who expressed varying degrees of support for the proposals, made a number of constructive comments, many of which have been incorporated into the proposed amendments.

Several comments from those who do not support the amendments dealt with service fees. Most of these commenters consider that the proposals do not make adequate provision for service fees. The Board notes that the amendments provide for a continuing service fee to persons of up to a maximum of .25 percent per annum of the average annual net asset value of shares sold by such persons that is not subject to the asset-based sales charge caps in other sections of the proposed amendments. Thus, subject to arrangements made with a mutual fund or its underwriter, a member could continue to receive a fee for servicing mutual fund accounts it introduced for as long as such accounts are in existence. This is the rationale for defining "sales charges" and "service fees" separately in the proposal. The Board wishes to encourage members to give continuing service to their customers after the sale and believes that this activity deserves the reasonable continuing compensation provided for in the proposed amendments.

The following are the changes to the proposed amendments, suggested by commenters and recommended by the NASD Investment Companies Committee ("Committee"), which have been approved by the Board of Governors.

Definition of "Person"

In the proposed amendments, the term "investor" was used in lieu of the term "person." A number of commenters noted that an adequate definition of a person is contained in the Investment Company Act of 1940, and this definition has been added to subparagraph (b)(4) of the Definitions section. "Investor" has been changed to "person" throughout the proposal.

Management Fees

The Board wishes to clarify that investment management fees and profits are not subject to the jurisdiction of the Association. Consequently, members will not be required to verify whether such fees or profits are being used, directly or indirectly, to finance sales-related expenses. Members will be able to rely on disclosures in prospectuses for information about sales-related fees and charges. Subparagraph (b)(8) of the Definitions section has been amended.

Service Fees

Several commenters felt that the definition of service fees in the proposal is too narrow. For example, it does not cover payments of service fees to nonmembers such as banks or foreign broker-dealers. The definition of service fees in subparagraph (b)(9) therefore has been broadened to permit service fees to be used for a wide variety of services provided by members and other entities to mutual fund shareholders. Service fees as defined do not include transfer agent or custodian fees paid by mutual funds. Subparagraph (b)(8)(C) has also been amended to define more clearly the distinction between "sales charges" and "service fees" in the proposal.

The Committee decided not to use the term "maintenance fee" in lieu of "service fee" as recommended by some commenters because it lacks the connotation of personal service that the Committee wishes to encourage.

The service fee limit in various parts of the proposed amendments is defined to be not more than .25 percent per annum of the average annual net assets of an investment company. This could mean that some members might receive more than .25 percent per annum of a mutual fund's assets for which they were responsible while others might receive less — the overall amount being not more than the maximum percentage of the total net assets permitted.

The Committee believes that the maximum percentage permitted should apply to all recipients and has amended the proposal to relate the maximum percentage of .25 percent per annum to the shares sold by any person. Thus, if the proposal is adopted, a recipient would be able to receive a service fee of not more than .25 percent per annum of the average annual net asset value of the shares it sold to customers. New section (d)(5) has been added.

As originally proposed, subparagraph (d)(l)(F) would not have permitted a mutual fund without an asset-based sales charge that reinvests dividends at the offering price to pay a service fee. The Committee feels that, with an appropriate haircut, such a prohibition should not apply. Accordingly, it has amended the subparagraph to permit such a service fee if the maximum aggregate sales charge does not exceed 6.25 percent of the offering price.

Maximum Front-End and Deferred Sales Charges

Subsection (d)(2) of the proposal deals with mutual funds that have an asset-based sales charge. Many such companies also have front-end and/or deferred sales charges. Since the caps in subparagraph (2)(A) and (2)(B) are a percentage of total new gross sales, it is possible to construct a scenario whereby some investors who make large investments might pay a minimal front-end sales charge while other investors might be required to pay a very high sales charge per individual transaction even though the overall sales charges related to the net assets of the fund are within the required maximum percentages. For example, a person investing $1 million might have to pay no front-end sales charge while a person investing $10,000 might have to pay an excessive front-end sales charge even though the aggregate sales charges by the fund were within the maximum percentages of total new gross sales permitted by the proposal. The Committee has amended both subparagraphs to set maximum front-end and/or deferred sales charges per individual transaction.

Exchanges

A number of commenters asked how exchanges of shares between companies in the same complex, between companies with multiple classes, and between series shares of a series investment company, should be treated, i.e., should they be treated as new sales for purposes of the maximum caps. The Committee believes that such exchanges should not be treated as new sales primarily because the extensive record-keeping that would be required would be an expensive and difficult burden for many mutual funds. However, if a mutual fund wishes to keep such records, the practice would be permitted provided that the increase in the maximum aggregate sales charges for the receiving mutual fund is deducted from the maximum aggregate sales charges of the redeeming company. Subparagraphs (2)(A) and (B) have been amended, and new subparagraph (D) has been added.

Treatment of Prior Sales and Unreimbursed Expenses

Several commenters remarked that the proposal does not deal adequately with unreimbursed sales-related expenses incurred in the past that would be amortized by asset-based and/or deferred sales charges after the amendments are adopted. They also pointed out that there is no provision for interest payments on the financing necessary to fund such expenses.

A new subparagraph (d)(2)(C) has been added to the proposed amendments that would apply the maximum permitted sales charges of 6.25 percent or 7.25 percent retroactively, on sales made prior to the effective date of the proposed amendments, to the time when a mutual fund first adopted an asset-based sales charge. An interest rate of prime plus one percent per annum would be added to the amount so calculated, and the total would be reduced by any front-end, asset-based, and deferred sales charges received prior to the effective date of the proposed amendments as a result of such sales. The net total would be added to the maximum aggregate sales charges on new gross sales calculated as described in subparagraphs (d)(2)(A) and (B). The grand total would be continually reduced by sales charges received by the investment company after the effective date of the proposed amendments. The interest rate of the prime rate plus one percent per annum would be applied to the fluctuating grand total over time.

"No Load" Designation

The proposed amendments would have prohibited members or their associated persons from describing an investment company with a deferred or an asset-based sales charge as "no load." The Committee considers that this prohibition should apply to a mutual fund that has a front-end or a deferred sales charge and to a fund that has an asset-based and/or a service fee that together exceed .25 percent of its average annual net assets. Subparagraph (d)(3) has been amended.

Tax Question

Some commenters believe that the requirement in subparagraph (2)(E)(ii) that excess deferred sales charges be credited to the net assets of an investment company may imperil a mutual fund's status as a regulated investment company under the provisions of the Internal Revenue Code. One commenter suggested excising the term "net assets" from the subparagraph. That has been done. The NASD does not wish to adversely affect the tax status of mutual funds by any provision of the rule and is continuing to study this area. If necessary, appropriate amendments will be made prior to the adoption of the proposal.

The following recommendations made by some commenters were not adopted.

Nonconforming Mutual Funds — Procedures for Exemption

Several commenters suggested that the NASD adopt procedures for the review and approval of sales charge structures that do not conform to the provisions of the proposed amendments. The Board of Governors is unwilling, at this time, to consider including exemptive provisions in the rule. It considers that the provisions of the amended rule will provide ample scope for innovation in the financing of sales-related expenses of mutual funds.

However, the Board would be willing, in view of the importance of the proposed amendments to the mutual fund industry and the fact that the NASD has yet to experience the effect of their implementation, to consider whether any changes are necessary after the NASD has had one year's experience in administering the new provisions.

Service Fees

Some commenters suggested a sliding, increasing scale of service fees with appropriate further haircuts to the maximum sales charge caps of 7.25 percent or 6.25 percent of gross new sales. Others commented that if a mutual fund did not offer the maximum service fee of .25 percent per annum of a fund's net asset value, the excess should be permitted to be added to the maximum asset-based sales charge of .75 percent.

The Board of Governors considers the maximum asset-based sales charge proposed of .75 percent per annum of average net assets and the maximum service fee of .25 percent of a fund's average annual net assets to be adequate to finance sales-related expenses and to provide compensation for continued service to mutual fund shareholder accounts. In addition, the Board does not wish to add further complexity to an already complex rule.

Application of the Proposed Amendments — Multiple Classes of Shares

Some commenters requested that the proposal be amended to clarify how the maximum caps should be applied when an investment company has multiple classes of shares or is a series investment company. The Board considers each class of shares and each series to be a separate investment company for purposes of the sales charge rule. In addition, the caps will apply to each class and each series and not to the investment company as a whole. The NASD has always applied its rules governing investment companies in this way, and the Board sees no reason to further amend the proposed amendments.

Grace Period

A number of commenters recommended that a grace period of one year be permitted, after the SEC approves the rule, before the rule is implemented. It is the intention of the NASD that such a provision will be provided for in the NASD's rule filing seeking SEC approval after member approval has been obtained. The membership will be notified of the effective date after SEC approval.

Technical Amendments

In addition to the changes described above that have been made to the proposed amendments, a number of technical changes have been made to clarify certain terms and to ensure uniformity in the language used.

EXPLANATION

A section-by-section analysis of the proposed amendments to subsections (b) and (d) of Article III, Section 26 of the NASD Rules of Fair Practice follows:

Definitions Section

(b)
(4) The current rule defines "person" as it is defined in Rule 22(d)-l under the Investment Company Act of 1940 ("the Act"), which no longer contains such a definition. The amendment defines "person" as it is defined in the definitions section of the Act.
(8) Sales charges are defined in this subsection to include all charges and fees, described in the prospectus, that are used to finance sales-related expenses. Included in the definition are front-end, deferred, and asset-based sales charges. Excluded are investment management fees and charges or fees that are used to defray ministerial, record-keeping, or administrative expenses. The provisions of the rule govern only sales-related charges described as such in the mutual fund prospectus, and members may rely on such prospectus disclosure for purposes of this section.
Nominal (i.e., small or minimal) charges incurred by shareholders on redemption of mutual fund shares for special services are excluded from the definition of deferred sales charges, as are redemption charges described in a prospectus to discourage short-term trading generally within one year of purchase of shares. Such nominal and short-term charges may not be used to pay for sales-related expenses and must be returned to the mutual fund.
The term "asset-based sales charge" is not defined in terms of a specific rule, such as Rule 12(b)-l under the Act. It is intended to encompass charges against net assets, disclosed in the prospectus, that are used to pay for sales-related expenses.
(9) A service fee is defined to be a payment by a mutual fund for a broad variety of services after the sale provided by members and other entities to mutual fund shareholders. The term "service fee" does not include transfer agent, custodian, or similar fees paid by mutual funds.
(10) The prime rate is the most preferential rate of interest charged by the largest commercial banks on loans to their corporate clients. It appears daily in The Wall Street Journal.

Sales Charges

(d) This subsection contains the general obligation of the NASD under Section 22(b) of the Act to prevent excessive sales charges on mutual funds sold by its members. A major restructuring of the rule was required to expand its provisions to include deferred and asset-based sales charges. This was accomplished by dividing the rule into two parts. Part One deals with funds that do not, and Part Two deals with funds that do have an asset-based sales charge.
(d)
(l) Part One, for the most part, reiterates the provisions of the current rule with minor changes to extend the rule's provisions to govern deferred sales charges. New subsection (d)(l)(E) would permit a fund without an asset-based sales charge to pay a service fee provided the aggregate front-end and/or deferred sales charges do not exceed 7.25 percent of the offering price. New subsection (d)(l)(F) would permit a fund without an asset-based sales charge that reinvests dividends at the offering price to pay a service fee provided (1) the aggregate front-end and/or deferred sales charges do not exceed 6.25 percent of the offering price and (2) the fund offers quantity discounts and rights of accumulation.
(d)
(2) This part is new and expands the rule to govern mutual funds with asset-based sales charges offered by members to the public.
(d)
(2)
(A) This subsection places a cap of 6.25 percent of new gross sales, plus an interest rate equal to the prime rate plus one percent per annum, on the total sales charges — asset-based, front-end, and deferred — levied by a mutual fund that pays a service fee. The reduction from 8.5 percent, the maximum permitted sales charge under the rule, to 6.25 percent occurs because asset-based sales charges do not provide quantity discounts or rights of accumulation and because a service fee, not subject to the cap, is paid.
The term "new gross sales" does not include sales resulting from the reinvestment of investment income or capital gains or from exchanges of shares between mutual funds in a complex of funds or between classes of shares in a fund with multiple classes or between series of a series fund. If a fund with an asset-based sales charge also has a front-end and/or a deferred sales charge, the latter two charges cannot exceed 6.25 percent of the amount invested by any person.
(d)
(2)
(B) This subsection permits a fund that has an asset-based sales charge and that does not pay a service fee to increase the cap described in subsection (d)(2)(A) to 7.25 percent of new gross sales plus an interest rate equal to the prime rate plus one percent, per annum. Front-end and/or deferred sales charges cannot exceed 7.25 percent of the amount invested by any person.
(d)
(2)
(C) Subsections (d)(2)(A) and (B) refer to sales made after the proposed amendments are adopted. This subsection would permit a mutual fund that has had an asset-based sales charge in the past to apply the appropriate cap of 6.25 percent or 7.25 percent retroactively to new gross sales from the time it first adopted an asset-based sales charge until the proposed amendments are implemented.
The amount thus calculated would be increased by an interest rate equal to the prime rate plus one percent per annum and reduced by any sales charges — front-end, deferred, or asset-based — on such sales or from net assets resulting from such sales. The net total would be added to the total calculated by the application of the provisions of subsections (d)(2)(A) or (B). The grand total would be reduced over time by sales charges received after the proposed amendments are implemented. This subsection permits past unreimbursed sales-related expenses to be accommodated within the provisions of the sales charge rule and provides for their gradual amortization.
(d)
(2)
(D) Despite the exclusion of exchanges from the definition of total new gross sales in the previous subsections, some mutual funds may wish to keep records of exchanges between mutual funds in the same complex, between classes of shares of mutual funds with multiple classes, and between series shares of series mutual funds. Such mutual funds may increase the maximum aggregate sales charges permitted under the previous sections by including such exchanges as new gross sales provided the maximum aggregate sales charges of the mutual fund, class, or series of the redeeming mutual fund are reduced by the amount of such increase.
(d)
(2)
(E)
(i) This subsection would prohibit a member from offering the shares of a mutual fund that has an asset-based sales charge in excess of .75 percent of its average annual net assets.
(d)
(2)
(E)
(ii) If the maximum cap described in subsections (d)(2)(A), (B), (C), and (D) is reduced to zero and a mutual fund still continues to receive deferred sales charges on redemption, such sales charges may not be used to pay for sales-related expenses.
(d)
(3) No person associated with an NASD member may describe, orally or in writing, a mutual fund as "no load" or as having "no sales charge" if the fund has a front-end or deferred sales charge or if it has an asset-based sales charge that exceeds .25 percent of average net assets per annum.
(d)
(4) Since the proposed amendments contemplate fund-level accounting rather than individual shareholder accounting, it is probable that long-term shareholders in a mutual fund that has an asset-based sales charge may pay more in total sales charges than they would have paid if the mutual fund did not have an asset-based sales charge. Members may not offer or sell shares of such mutual funds if the fund does not disclose this information near the fee table at the front of a prospectus.
(d)
(5) A member may not offer or sell the shares of a mutual fund if it pays a service fee in excess of .25 percent of its average annual net assets. No person or entity can be paid a service fee by a mutual fund that exceeds .25 percent of the average annual net asset value of the shares of the fund that were sold originally by such a person or entity.

REQUEST FOR VOTE

The NASD Board of Governors believes that the proposed rule amendments will assist the NASD in meeting its obligation, under the mandate given to it by the U.S. Congress, to prevent excessive sales charges on mutual fund shares sold to the public by NASD members.

Thus, the Board considers the proposed amendments necessary and appropriate and recommends that members vote their approval. Please mark the attached ballot according to your convictions and mail it in the enclosed, stamped envelope to The Corporation Trust Company. Ballots must be postmarked no later than October 5, 1990.

Questions concerning this notice should be directed to A. John Taylor, Vice President, Investment Companies/Variable Contracts, at (202) 728-8328.

PROPOSED AMENDMENTS TO SUBSECTIONS (B) AND (D) OF ARTICLE III, SECTION 26 OF THE NASD RULES OF FAIR PRACTICE

(Note: New text is underlined; deleted text is in brackets.)

DEFINITIONS

(b)
(4) Person ["any person"] shall mean "person" ["any person"] as defined in [subsection (a) or "purchaser" as defined in subsection (b) of Rule 22d-l under] the Investment Company Act of 1940.
(8) "Sales charge" and "sales charges" as used in subsection (d) of this section shall mean all charges or fees that are paid to finance sales or sales promotion expenses, including front-end, deferred and asset-based sales charges, excluding charges and fees for ministerial, recordkeeping or administrative activities and investment management fees. For purposes of this section, members may rely on the sales-related fees and charges disclosed in the prospectus of an investment company.
(A) A "front-end sales charge" is a sales charge that is included in the public offering price of the shares of an investment company.
(B) A "deferred sales charge" is a sales charge that is deducted from the proceeds of the redemption of shares by an investor, excluding any such charges that are (i) nominal and are for services in connection with a redemption or (ii) to discourage short-term trading, that are not used to finance sales-related expenses, and that are credited to the net assets of the investment company.
(C) An "asset-based sales charge" is a sales charge that is deducted from the net assets of an investment company and does not include a service fee.
(9) "Service fees" as used in subsection (d) of this section shall mean payments by an investment company for personal service and/or the maintenance of shareholder accounts.
(10) "Prime rate" as used in subsection (d) of this section shall mean the most preferential interest rate on corporate loans at large U.S. money center commercial banks.

Sales Charges

(d) No member shall offer or sell the shares of any open-end investment company or any "single payment" investment plan issued by a unit investment trust (collectively "investment companies") registered under the Investment Company Act of 1940 if the sales charges described in the prospectus are excessive. [if the public offering price includes a sales charge which is excessive, taking into consideration all relevant circumstances.] Aggregate [S]sales charges shall be deemed excessive if they do not conform to the following provisions:
(1) Investment Companies Without an Asset-Based Sales Charge
[(1)]
(A) Front-end and/or deferred sales charges described in the prospectus which may be imposed by an investment company without an asset-based sales charge [The maximum sales charge on any transaction] shall not exceed 8.5% of the offering price.
[(2)(A)]
(B)
(i) Dividend reinvestment may [shall] be made available at net asset value per share to any person who requests such reinvestment, [at least ten days prior to the record date subject only to the right to limit the availability of dividend reinvestment to holders of securities of a stated minimum value, not greater than $1200.]
[(B)]
(ii) If dividend reinvestment is not made available as specified [on terms at least as favorable as those] in subparagraph (B)(i) [(2)(A)], the maximum aggregate sales charge [on any transaction] shall not exceed 7.25% of the offering price.
[(3)(A)]
(C)
(i) Rights of accumulation (cumulative quantity discounts) may [shall] be made available to any person [for a period of not less than 10 years from the date of first purchase] in accordance with one of the alternative quantity discount schedules provided in subparagraph (D)(i) [(4)(A)] below, as in effect on the date the right is exercised.
[(B]]
(ii) If rights of accumulation are not made available on terms at least as favorable as those specified in subparagraph (C)(i)[(3)(A)] the maximum aggregate sales charge [on any transaction] shall not exceed:
[(i)]
(a) 8% of offering price if the provisions of subparagraph (B)(i)[(2)(A)] are met; or
[(ii)]
(b) 6.75% of offering price if the provisions of subparagraph (B)(i) [(2)(A)] are not met.
[(4)(A)]
(D)
(i) Quantity discounts, if offered, shall be made available on single purchases by any person in accordance with one of the following two alternatives:
[(i)]
(a) A maximum aggregate sales chrge of 7.75% on purchases of $10,000 or more and a maximum aggregate sales charge of 6.25% on purchases of $25,000 or more, or
(b) A maximum aggregate sales charge of 7.50% on purchases of $15,000 or more and a maximum aggregate sales charge of 6.25% on purchases of $25,000 or more.
[(B)]
(ii) If quantity discounts are not made available on terms at least as favorable as those specified in subparagraph (D)(i) [(4)(A)] the maximum aggregate sales charge [on any transaction] shall not exceed:
[(i)]
(a) 7.75% of the offering price if the provisions of subparagraphs (B)(i) and (C)(i) [(2)(A) and (3)(A)] are met.
[(ii)]
(b) 7.25% of the offering price if the provisions of subparagraph (B)(i) [(2)(A)] are met but the provisions of subparagraph (C)(i) [(3)(A)] are not met.
[(iii)]
(c) 6.50% of the offering price if the provisions of subparagraph (C)(i) [(3)(A)] are met but the provisions of subparagraph (B)(i) [(2)(A)] are not met.
[(iv)]
(d) 6.25% of the offering price if the provisions of subparagraphs (B)(i) and (C)(i) [(2)(A) and (3)(A)] are not met.
(E) If an investment company without an asset-based sales charge pays a service fee, the maximum aggregate sales charge shall not exceed 7.25% of the offering price.
(F) If an investment company without an asset-based sales charge reinvests dividends at offering price, it shall not offer or pay a service fee unless it offers quantity discounts and rights of accumulation and the maximum aggregate sales charge does not exceed 6.25% of the offering price.
(2) Investment Companies With an Asset-Based Sales Charge
(A) Except as provided in subparagraphs (2)(C) and (2)(D), the aggregate asset-based, front-end and deferred sales charges described in the prospectus which may be imposed by an investment company with an asset-based sales charge, if the investment company has adopted a plan under which service fees are paid, shall not exceed 6.25% of total new gross sales (excluding sales from the reinvestment of distributions and exchanges of shares between investment companies in a single complex, between classes of shares of an investment company with multiple classes of shares or between series shares of a series investment company) plus interest charges on such amount equal to the prime rate plus one percent per annum. The maximum front-end or deferred sales charge resulting from any transaction shall be 6.25% of the amount invested.
(B) Except as provided in subparagraphs (2)(C) and (2)(D), if an investment company with an asset-based sales charge does not pay a service fee, the aggregate asset-based, front-end and deferred sales charges described in the prospectus shall not exceed 7.25% of total new gross sales (excluding sales from the reinvestment of distributions and exchanges of shares between investment companies in a single complex, between classes of shares of an investment company with multiple classes of shares or between series shares of a series investment company) plus interest charges on such amount equal to the prime rate plus one percent per annum. The maximum front-end or deferred sales charge resulting from any transaction shall be 7.25% of the amount invested.
(C) The maximum aggregate sales charge on total new gross sales set forth in subparagraphs (2)(A) and (B) may be increased by an amount calculated by applying the appropriate percentages of 6.25% or 7.25% to total new gross sales which occurred after an investment company first adopted an asset-based sales charge until the (effective date of these amendments) plus interest charges on such amount equal to the prime rate plus one percent per annum less any front-end, asset-based or deferred sales charges on such sales or net assets resulting from such sales.
(D) The maximum aggregate sales charges of an investment company in a single complex, a class of shares issued by an investment company with multiple classes of shares or a separate series of a series investment company, may be increased to include sales of exchanged shares provided that such increase is deducted from the maximum aggregate sales charges of the investment company, class or series which redeemed the shares for the purpose of such exchanges.
(E) No member shall offer or sell the shares of an investment company with an asset-based sales charge if:
(i) The amount of the asset-based sales charge exceeds .75 of 1% per annum of the average annual net assets of the investment company.
(ii) Any deferred sales charges deducted from the proceeds of a redemption after the maximum cap described in subparagraphs (2)(A), (B), (C) and (D) has been attained are not credited to the investment company.
(3) No member or person associated with a member shall, either orally or in writing, describe an investment company as being "no load" or as having "no sales charge" if the investment company has a front-end or deferred sales charge or whose total charges against net assets to provide for sales related expenses and/or service fees exceed .25 of 1% of average net assets per annum.
(4) No member or person associated with a member shall offer or sell the securities of an investment company with an asset-based sales charge unless its prospectus discloses that long-term shareholders may pay more than the economic equivalent of the maximum front-end sales charges permitted by this section. Such disclosure shall be adjacent to the fee table in the front section of a prospectus.
(5) No member or person associated with a member shall offer or sell the securities of an investment company if the service fees paid by the investment company, as disclosed in the prospectus, exceed .25 of 1% of its average annual net assets or if a service fee paid by the investment company, as disclosed in the prospectus, to any person who sells its shares exceeds .25 of 1% of the average annual net asset value of such shares.

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