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89-35 Misuse of "No Load" Terminology in the Offer of Mutual Funds That Have Contingent Deferred Sales Loads

SUGGESTED ROUTING*

Institutional
Legal & Compliance
Mutual Fund
Operations
Training

*These are suggested departments only. Others may be appropriate for your firm.

EXECUTIVE SUMMARY

The NASD has received a number of complaints from investors in mutual funds that have no front-end sales loads but that have contingent deferred sales loads (CDSLs). The NASD intends to investigate the circumstances that generated each of the complaints received and to pursue disciplinary action against persons associated with NASD members who misrepresented the sales load structure of any of the mutual funds purchased by the complainants.

Background and Explanation

CDSLs are sales loads that are charged on redemption on a declining percentage basis annually and are usually reduced to zero percent by the sixth or seventh year of share ownership. The complaining investors allege that registered representatives, when offering the securities, described the funds as "no load" or as having "no initial load." The investors claim they were unaware of the CDSL until they decided to redeem their shares.

To assert that a mutual fund with a CDSL is a "no load fund" is an unacceptable misrepresentation. To state that there is "no initial load" without explaining the nature of the CDSL is an omission of material information.

Stated simply, such funds are not "no load" funds, and to say or imply that they are is a violation of Article III, Section I of the NASD Rules of Fair Practice that is not alleviated by the disclosures about a CDSL in a mutual fund's prospectus.

All members and their registered representatives must ensure that prospective investors understand the nature of the various charges made by mutual funds to defray sales and sales promotion expenses, whether they are deducted from an investor's purchase payment, charged on redemption, or levied against the net assets of a fund.

Please ensure that this notice is distributed to all persons associated with your firm who are engaged in the sale or distribution of mutual funds.

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


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