The FAA issued an Airworthiness Directive requiring aircraft owners to upgrade faulty Standby Vacuum Systems (SVS) within one year after failures linked to a…

10521Federal  Register/ Vol.  70,  No.  42 / Friday,  March  4,  2005 / Proposed  Rules  
What Is the Unsafe Condition Presented in 
This AD? 
(d) This AD is the result of several reports 
of failed shuttle control valves of the SVS 
and one report of an airplane crash with a 
fatality in which improper use of the SVS 
was a factor. The actions specified in this AD 
are intended to correct problems with the 
SVS before failure or malfunction during 
instrument flight rules (IFR) flight that can 
lead to pilot disorientation and loss of 
control of the aircraft.
What Must I Do To Address This Problem? 
(e) To address this problem, you must do 
the following:
Actions                                                                Compliance                                                                Procedures                                                                
(1)  Incorporate  the  airplane  flight  manual  sup-
plement  (AFMS)  in  the  airplane  flight  manual  
with  the  appropriate  revision  in  the  FAA-ap-
proved airplane flight manual (AFM).
Within  30  days  after  the  effective  date  of  this  
AD, unless already done.
Not Applicable. 
(i) The owner/operator holding at least a private 
pilot  certificate  as  authorized  by  section  43.7  
of  the  Federal  Aviation  Regulations  (14  CFR  
43.7)  may  do  the  flight  manual  changes  re-
quirement of this AD. 
(ii)  Make  an  entry  in  the  aircraft  records  show-
ing  compliance  with  this  portion  of  the  AD  
following  section  43.9  of  the  Federal  Aviation  
Regulations (14 CFR 43.9). 
(2) Install placards described in the AFMS  .......    Before   further   flight   after   incorporating   the 
AFMS  in  the  FAA-approved  airplane  flight  
manual  (AFM)  required  by  paragraph  (e)(1)  
of this AD.
Follow   the   Standby   Vacuum   System   AFM   
SUPPLEMENT, dated February 4, 2000. 
(3)  Upgrade  the  Model  SVS  I  or  SVS  IA  SVS  
to  the  Model  SVS  VISVS,  install  the  appro-
priate  placards,  and  add  the  installation  re-
port  including  the  instructions  for  continued  
airworthiness    (ICA)    to    the    maintenance    
schedule for the aircraft.
Within  1  year  after  the  effective  date  of  this  
AD, unless already done.
Follow  Precise  Flight,  Inc.  Installation  Report  
No.  08080,  Standby  Vacuum  System  Model  
VI—Shuttle  Valve  S/N  10243  &  Subsequent  
(Manual  Valve),  Revision  A,  dated  February  
21, 2001. 
(4)  Do  not  install  any  Model  SVS  I  or  SVS  IA  
SVS  without  also  doing  the  actions  required  
by paragraphs (e)(1), (e)(2) and (e)(3) of AD.
As of the effective date of this this AD  ............    Not applicable. 
May I Request an Alternative Method of 
Compliance? 
(f) You may request a different method of 
compliance or a different compliance time 
for this AD by following the procedures in 14 
CFR 39.19. Unless FAA authorizes otherwise, 
send your request to your principal 
inspector. The principal inspector may add 
comments and will send your request to the 
Manager, Seattle Aircraft Certification Office 
(ACO), FAA. For information on any already 
approved alternative methods of compliance, 
contact Ms. Marcia Smith, Aerospace 
Engineer, FAA, Seattle Aircraft Certification 
Office, 1601 Lind Avenue, SW, Renton, 
Washington 98055–4065; telephone: (425) 
917–6484; facsimile: (425) 917–6590. 
May I Get Copies of the Documents 
Referenced in This AD? 
(g) To get copies of the documents 
referenced in this AD, contact Precise Flight, 
Inc., 63120 Powell Butte Road, Bend Oregon 
97701, telephone: (800) 547–2558; facsimile: 
(541) 388–1105; electronic mail: 
[email protected]; Internet: 
http://www.preciseflight.com/. To view the 
AD docket, go to the Docket Management 
Facility; U.S. Department of Transportation, 
400 Seventh Street, S.W., Nassif Building, 
Room PL–401, Washington, DC, or on the 
Internet at http://dms.dot.gov. The docket 
number is FAA–2004–19354.
Issued in Kansas City, Missouri, on 
February 23, 2005. 
David R. Showers, 
Acting Manager, Small Airplane Directorate, 
Aircraft Certification Service.
[FR Doc. 05–4239 Filed 3–3–05; 8:45 am] 
BILLING  CODE  4910–13–P
SECURITIES AND EXCHANGE 
COMMISSION 
17 CFR Parts 239, 240 and 274 
[Release Nos. 33–8544; 34–51274; IC–
26778; File No. S7–06–04] 
RIN 3235–AJ11; 3235–AJ12; 3235–AJ13; 
3235–AJ14 
Point of Sale Disclosure Requirements 
and Confirmation Requirements for 
Transactions in Mutual Funds, College 
Savings Plans, and Certain Other 
Securities, and Amendments to the 
Registration Form for Mutual Funds
AGENCY: Securities and Exchange 
Commission.
ACTION: Proposed rule; reopening of 
comment period and supplemental 
request for comment. 
SUMMARY: The Securities and Exchange 
Commission (‘‘Commission’’) is 
reopening the comment period on 
proposed rules, published in January 
2004, that would require broker-dealers 
to provide their customers with 
information regarding the costs and 
conflicts of interest that arise from the 
distribution of mutual fund shares, 529 
college savings plan interests, and 
variable insurance products. The 
Commission also is supplementing its 
request for comments on the proposed 
rules to reflect issues raised by 
commenters, including feedback 
received from investors in in-depth 
interviews about revised forms for 
disclosing information at the point of 
sale. The Commission is publishing this 
supplemental request for comment and 
reopening the comment period to assure 
that the public has a full opportunity to 
address such issues in their comments.
DATES: Comments should be submitted 
on or before April 4, 2005.
ADDRESSES: Comments may be 
submitted by any of the following 
methods: 
Electronic Comments 
•Use the Commission’s Internet 
comment form (http://www.sec.gov/
rules/proposed.shtml); or 
•Send an e-mail to rule-
[email protected]. Please include File 
Number S7–06–04 on the subject line; 
or 
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10522Federal  Register/ Vol.  70,  No.  42 / Friday,  March  4,  2005 / Proposed  Rules  
1
See Securities Exchange Act Release No. 49148 
(January 29, 2004), 69 FR 6438 (February 10, 2004) 
(‘‘Proposing Release’’).
2
College savings plans are often referred to as 
‘‘529 savings plans.’’
3
In the Proposing Release, and on the forms 
attached to the Proposing Release, we used the term 
‘‘revenue sharing’’ to refer to payments to broker-
dealers for promoting certain covered securities 
over others. However, investor feedback indicated 
that the term ‘‘revenue sharing’’ is not easily 
understandable. While we continue to refer to the 
term ‘‘revenue sharing payment’’ in this release, we 
have removed references to ‘‘revenue sharing’’ from 
the forms attached to this release and instead refer 
to payments broker-dealers receive for promoting 
certain covered securities over others. See infra part 
II.A.3.
4
The full text of comments to the proposal, 
including the text of standard letter types, is 
publicly available at: http://www.sec.gov/rules/
proposed/s70604.shtml.
5
In the Proposing Release, we proposed rule 
language to require confirmation disclosure of 
comparative information about certain costs and 
conflicts. This release does not address those 
proposed requirements, given that the content of 
comparison information and the form of disclosure 
(e.g., at the point of sale versus in confirmations) 
in large part will depend upon any final point of 
sale and confirmation requirements. At a later date 
and in a separate release, we plan to request further 
comments about comparison range disclosure 
requirements.
•Use the Federal eRulemaking Portal 
(http://www.regulations.gov). Follow the 
instructions for submitting comments. 
Paper Comments 
•Send paper comments in triplicate 
to Jonathan G. Katz, Secretary, 
Securities and Exchange Commission, 
450 Fifth Street, NW, Washington, DC 
20549–0609. All submissions should 
refer to File Number S7–06–04. This file 
number should be included on the 
subject line if e-mail is used. To help us 
process and review your comments 
more efficiently, please use only one 
method. The Commission will post all 
comments on the Commission’s Internet 
Web site (http://www.sec.gov/rules/
proposed.shtml). Comments also are 
available for public inspection and 
copying in the Commission’s Public 
Reference Room, 450 Fifth Street, NW, 
Washington, DC 20549. All comments 
received will be posted without change; 
we do not edit personal identifying 
information from submissions. You 
should submit only information that 
you wish to make available publicly.
FOR FURTHER INFORMATION CONTACT: 
With respect to Securities Exchange Act 
Rules 10b–10, 15c2–2, and 15c2–3, 
contact Catherine McGuire, Chief 
Counsel, Paula R. Jenson, Deputy Chief 
Counsel, Joshua S. Kans, Branch Chief, 
David W. Blass, Branch Chief, or John 
J. Fahey, Attorney, at (202) 942–0073, 
Office of Chief Counsel, Division of 
Market Regulation, Securities and 
Exchange Commission, 450 Fifth Street, 
NW., Washington, DC 20549–1001. 
With respect to Form N–1A, contact 
Deborah Skeens, Senior Counsel, at 
(202) 942–0721, Office of Disclosure 
Regulation, Division of Investment 
Management, Securities and Exchange 
Commission, 450 Fifth Street, NW, 
Washington, DC 20549–0506.
SUPPLEMENTARY INFORMATION: 
I. Introduction 
On January 29, 2004, the Commission 
issued, and requested comment on, two 
proposed new rules, as well as rule 
amendments under the Securities 
Exchange Act of 1934 designed to 
enhance the information broker-dealers 
provide to their customers in 
connection with transactions in certain 
types of securities.
1
Proposed rules 
15c2–2 and 15c2–3 would require 
broker-dealers to provide their 
customers with targeted information, at 
the point of sale and in transaction 
confirmations, regarding the costs and 
conflicts of interest that arise from the 
distribution of mutual fund shares, 529 
college savings plan interests
2
, and 
variable insurance products 
(collectively, ‘‘covered securities’’). The 
Commission also proposed conforming 
amendments to rule 10b-10, its general 
confirmation rule, as well as 
amendments to that rule to provide 
investors with additional information 
about call features of debt securities and 
preferred stock. Finally, the 
Commission proposed amendments to 
Form N–1A, the registration form for 
mutual funds, to improve disclosure of 
sales loads and revenue sharing 
payments.
3
We received over one thousand 
separate comments on the proposed 
rules and rule amendments, as well as 
over four thousand comments from 
individuals and entities using a variety 
of standard letter types.
4
Because 
proposed rules 15c2–2 and 15c2–3 were 
intended to provide clear and useful 
disclosure to investors, we actively 
encouraged comments from individual 
investors and investor groups. We also 
met with numerous investor groups, and 
engaged a consultant to assist in 
investor testing of possible forms for 
confirmation and point of sale 
disclosures.
The comments and other feedback we 
received suggest a number of areas 
where the proposed point of sale and 
confirmation disclosure requirements 
may need to be revised to more 
effectively communicate information to 
investors, while more efficiently 
balancing the benefits of disclosure 
against the costs of compliance. In 
addition, some feedback suggests that 
we should consider taking a more 
layered approach to disclosure by 
requiring broker-dealers to use the 
Internet as a disclosure medium to 
supplement point of sale and 
confirmation disclosure. 
Section II of this release discusses 
possible improvements to the proposed 
point of sale disclosure rule for 
transactions in covered securities. 
Section III discusses possible 
improvements to the proposed 
confirmation disclosure rule for 
transactions in covered securities. 
Section IV discusses the possible 
requirement for broker-dealers to 
disclose detailed information about 
revenue sharing payments and other 
broker compensation practices on the 
Internet. Section V discusses possible 
changes to the prospectus disclosure of 
revenue sharing. Section VI contains a 
general request for comments on this 
release and also renews our request for 
comments on the proposals in the 
Proposing Release.
5
II. Point of Sale Proposal 
Proposed rule 15c2–3 was intended to 
improve investment decisionmaking by 
providing investors at the point of sale 
with information about costs and 
conflicts of interest associated with 
purchases of covered securities. 
Comments and investor feedback 
indicated, however, that while point of 
sale disclosure may be quite useful to 
investors, there are a number of areas 
that could be enhanced to make the 
proposed rule more effective. These 
include: (a) The content and format of 
the disclosure that would be required 
under the proposed rule, including the 
disclosure of ‘‘management fees’’ and 
‘‘other expenses’’ of the covered 
security; (b) the manner in which oral 
point of sale disclosures would be 
made; (c) the timing of delivery of point 
of sale disclosures; (d) exceptions to the 
requirement to deliver point of sale 
disclosures; and (e) special issues 
related to variable insurance products. 
We seek additional comment about 
these key areas, as detailed below. 
A. Content and Format of Proposed 
Point of Sale Disclosure for Covered 
Securities 
1. Brief Summary of Select Comments to 
the Proposing Release Relating to Point 
of Sale Disclosure 
We received substantial feedback on 
the point of sale forms that would be 
required under proposed rule 15c2–3. 
Some investors were confused by the 
use of industry jargon, such as ‘‘sales 
loads’’ and ‘‘revenue sharing,’’ in the 
forms attached to the Proposing Release. 
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10523Federal  Register/ Vol.  70,  No.  42 / Friday,  March  4,  2005 / Proposed  Rules  
6
AARP conducted its own investor testing, which 
further indicated that the proposed disclosure form 
was not effective in communicating information to 
many investors.
7
While many investors recognized that dollar-
based disclosure of future annual costs is 
hypothetical in nature, in that these costs would 
vary over time, they nonetheless concluded that 
such dollar-based disclosure would help them make 
better investment decisions. Consumer advocates 
also supported this change, stating that point of sale 
disclosure that failed to include information about 
fund management fees and other non-distribution 
costs could cause some investors to mistakenly 
believe that those additional costs of ownership are 
not present.
8
See Letter from Mary L. Shapiro, Vice Chairman, 
NASD, and President, Regulatory Policy and 
Oversight, NASD, to Jonathan G. Katz, Secretary, 
Commission, dated May 4, 2004; Letter from Mary 
L. Shapiro, Vice Chairman, NASD, and President, 
Regulatory Policy and Oversight, NASD, to 
Jonathan G. Katz, Secretary, Commission, dated 
August 20, 2004; Letter from Mike Scafati, Senior 
Vice President, A.G. Edwards & Sons, Inc., dated 
April 12, 2004; Letter from William Lutz, Professor 
of English, Rutgers University, to Jonathan G. Katz, 
Secretary, Commission, dated April 12, 2004; Letter 
from Nancy M. Smith to Jonathan G. Katz, 
Secretary, Commission, dated April 12, 2004; Letter 
from Nancy M. Smith to Jonathan G. Katz, 
Secretary, Commission, dated April 22, 2004; Letter 
from Amy B.R. Lancellotta, Acting General Counsel, 
Investment Company Institute, to Jonathan G. Katz, 
Secretary, Commission, dated April 12, 2004; 
Memorandum from the Division of Market 
Regulation regarding a meeting with representatives 
of the Investment Company Institute, dated October 
26, 2004; and Memorandum from the Division of 
Market Regulation regarding a meeting with 
representatives of the Securities Industry 
Association, dated October 26, 2004.
9
Some commenters also stated that the proposed 
disclosure requirement should not encompass 
payments that a broker-dealer receives for 
underwriting state bonds, or payments received by 
banks that are affiliated with broker-dealers, or 
certain payments that broker-dealers receive from 
affiliated fund complexes.
10
That particularly may be an issue with regard 
to payments received by fund ‘‘supermarkets’’ 
operated by certain broker-dealers.
11
Regardless of the characterization, a broker-
dealer’s receipt of special payments from some fund 
complexes but not others gives the broker-dealer 
monetary incentives to promote the sale of 
securities of the fund complexes that make those 
payments. That is true even if the payments solely 
reimburse the broker-dealer for sales and servicing 
costs it incurs.
12
The Commission retained Siegel & Gale, LLC 
and Gelb Consulting Group, Inc. to help develop 
and test model disclosure forms that would 
effectively convey information to investors. See 
Siegel & Gale, LLC/Gelb Consulting Group, Inc., 
‘‘Results of In-Depth Investor Interviews Regarding 
Proposed Mutual Fund Sales Fee and Conflict of 
Interest Disclosure Forms: Report to the Securities 
and Exchange Commission,’’ (November 4, 2004) 
and ‘‘Supplemental Report to the Securities and 
Exchange Commission’’ (November 29, 2004) 
(together, the ‘‘Siegel & Gale/Gelb Consulting 
Report’’). The report is available at http://
www.sec.gov/rules/proposed/s70604/rep110404.pdf 
and the supplemental report is available at http://
www.sec.gov/rules/proposed/s70604/sup-
rep010705.pdf.
13
Thus, for example, a customer contemplating 
buying class A mutual fund shares with an upfront 
sales fee would receive a form that would reflect 
that upfront fee in a standardized format, but a 
broker-dealer would not be required to include 
information about deferred sales fees, which are not 
applicable to class A shares.
14
As discussed below, those special costs may 
include, among others, account opening fees 
imposed by the issuers of college savings plans, or 
purchase or redemption fees imposed by funds.
15
This section discusses generally the proposed 
new point of sale disclosure forms for all covered 
securities. We recognize, however, that variable 
insurance products have special disclosure issues. 
We discuss additional forms more appropriate to 
those products in part II.E.
16
The proposed new ‘‘model’’ forms in 
Attachments 1–3 and 4–6 depict how the required 
forms would be filled in for hypothetical mutual 
funds or 529 savings plans, respectively.
Some stated that the definitions and 
explanatory materials were not as useful 
as they would have liked. Others stated 
that the forms did not adequately 
differentiate one-time costs from 
ongoing costs.
6
Also, many investors 
wanted point of sale disclosure to 
provide comprehensive information 
about all the costs of owning covered 
securities, not just distribution-related 
costs. They sought comprehensive 
information about ownership costs, in 
percentage terms and in dollar terms, to 
better inform them about the total costs 
associated with purchasing and owning 
these securities.
7
Some securities industry commenters 
urged the Commission to revisit the 
proposed requirement that point of sale 
disclosure be specific to the anticipated 
amount of the customer’s transaction, 
stating that such quantified disclosure 
would be difficult and costly to provide. 
Some saw standardized point of sale 
disclosure as preferable to transaction-
specific disclosure and some viewed 
point of sale disclosure as overly time-
consuming for broker-dealers to deliver, 
particularly over the telephone. 
Some commenters suggested specific 
changes to the wording and layout of 
the proposed point of sale forms, and 
provided alternative forms for us to 
consider.
8
In addition, we received 
several comments about the proposed 
‘‘yes or no’’ point of sale disclosure of 
whether a broker-dealer or its affiliates 
receive revenue sharing from a person 
within a fund complex. The disclosure 
requirement, including proposed 
definitions of ‘‘revenue sharing’’ and 
‘‘fund complex,’’ in general would have 
required a broker-dealer to disclose 
whether it receives certain payments 
from affiliates of the issuer of the 
covered security, but not from the issuer 
itself. Disclosure about special 
compensation arrangements was 
intended to alert customers to those 
conflicts of interest and promote further 
inquiry.
One commenter suggested that the 
disclosure requirement relating to 
revenue sharing should be more 
focused, stating that the proposal would 
encompass payments unrelated to the 
distribution of covered securities 
purchased by a customer.
9
Commenters 
also expressed concern that the 
provisions of the proposed rules relating 
to revenue sharing would lead to 
inconsistent disclosure depending upon 
how payments are depicted by a fund 
complex, particularly in light of the 
proposed exclusion for payments by 
issuers.
10
Some commenters also 
suggested that such payments merely 
constitute ‘‘cost sharing’’ by which fund 
families compensate broker-dealers for 
services that the fund families otherwise 
would incur.
11
2. Revised Point of Sale Disclosure 
Forms 
In response to the comments we 
received to the Proposing Release, we 
sought feedback from investors and 
have developed revised forms that we 
are considering adopting.
12
Broker-
dealers would be required to deliver 
these proposed new forms at the point 
of sale before a customer purchases a 
covered security. Consistent with 
investors’ views that disclosure should 
be targeted and should exclude 
irrelevant information, broker-dealers 
would not use a ‘‘one size fits all’’ form 
to provide written point of sale 
disclosure to customers. Instead, while 
broker-dealers would have to disclose 
specific categories of information in a 
required format to the extent those 
categories are applicable, the written 
point of sale forms would omit 
categories of information that are not 
applicable to a particular purchase.
13
 
This targeted approach would limit 
‘‘information overload’’—which can 
undercut the effectiveness of highly 
detailed disclosure—and also would 
facilitate disclosure of special costs 
associated with particular securities.
14
It 
therefore should lead to disclosure that 
is as standardized as possible, while 
targeted enough to be useful to a wide 
range of investors. We would hope that 
investors would request, and broker-
dealers would provide, forms for 
different share classes where applicable 
and where consistent with suitability 
obligations, in order to help investors 
make informed investment decisions.
Consistent with those principles, the 
forms in Attachments 1–6 reflect 
feedback we have received through 
investor outreach about how to improve 
the clarity and readability of the forms, 
as well as additional analysis about how 
to improve their cost-effectiveness.
15
 
Attachments 1–3 show proposed new 
‘‘models’’ of required point of sale 
disclosure forms filled in for a 
hypothetical mutual fund,
16
with the 
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10524Federal  Register/ Vol.  70,  No.  42 / Friday,  March  4,  2005 / Proposed  Rules  
17
There are potential disclosure efficiencies 
associated with standardized disclosure, such as the 
use of preprinted forms. At the same time, however, 
our testing has shown that many investors want 
information at the point of sale that is specific to 
the anticipated amount of their purchase. The 
proposed new forms are intended to strike a balance 
between the use of standardized disclosure and the 
ability for interested investors to receive more 
personalized information. 
In developing these new proposed forms, we 
considered disclosing information based on a 
$10,000 hypothetical investment. However, our 
investor testing indicated that disclosure based on 
a $1,000 hypothetical investment should permit 
customers to more easily estimate the costs for their 
actual purchase amount than disclosures based on 
a $10,000 hypothetical investment. Furthermore, 
disclosure of information based on hypothetical 
$50,000 and $100,000 investments provide 
additional context and also illustrate the effect of 
breakpoint discounts on upfront sales loads 
(referred to on the forms and in this release as 
‘‘sales fees’’ for mutual funds).
18
Whenever an upfront sales fee is charged, the 
amount of the investment is less than what the 
customer pays.
19
The ‘‘investment amount’’ could be defined to 
equal the customer’s total payment less the upfront 
sales fee.
20
The amount of any back end sales fee depends 
on the time an investor sells the covered security 
and the net asset value of the covered security at 
that time, the actual amount of the fee would not 
be known at the point of sale.
21
Broker-dealers would not be required to 
include the amounts of revenue sharing payments 
on the point of sale disclosure forms, or on 
transaction confirmations. This differs from the 
proposed rules described in the Proposing Release. 
Some investors expressed more interest in 
information about the existence of the conflict of 
interest created by the revenue sharing payments 
than the amounts paid under revenue sharing 
arrangements. While descriptive information about 
the conflicts posed by revenue sharing 
arrangements is necessary to inform customers 
about the conflicts of interest facing their agents, as 
discussed below in part IV, Internet-based 
disclosure may be a preferable means for giving 
investors detailed and more thorough information 
about revenue sharing payments their broker-dealer 
receives and the conflicts of interest those payments 
create.
22
As proposed, point of sale disclosure of 
differential compensation practices would not cover 
situations in which an associated person has a 
financial incentive to sell securities that pay a 
relatively high dealer concession or commission to 
the broker-dealer, even though that could translate 
into a relatively high payment to the associated 
person. That type of compensation incentive was 
not proposed to be captured at the point of sale due 
to the need to keep point of sale disclosure simple 
differences among the forms reflecting 
differences in share classes and other 
pricing attributes. Attachments 4–6 
show proposed new ‘‘models’’ for the 
required point of sale disclosure forms 
filled in for a hypothetical 529 savings 
plan, again reflecting differences in 
pricing. Following is a summary of 
some of the key aspects of these forms:
a. Clarity of the forms. We believe that 
the forms in Attachments 1–6 are clearer 
and easier to understand than the point 
of sale forms attached to the Proposing 
Release. Where possible, we have used 
plain English in the forms, rather than 
using industry jargon. In addition, 
broker-dealers would be required to 
deliver forms in the same format, 
including font size and layout, as that of 
Attachments 1–6. 
b. Identification of security subject to 
disclosure. Broker-dealers would be 
required to more clearly identify the 
security subject to disclosure in the 
forms. For example, in the case of 
mutual funds, this would include the 
disclosure of the fund’s ticker symbol (if 
applicable). In the case of 529 savings 
plans, this would include disclosure of 
the specific age-based or other portfolio 
within the plan, if applicable, and the 
name of the state that sponsors the plan, 
if that name otherwise would not be 
identified. Disclosure of point of sale 
information for 529 savings plan 
interests also would include brief text 
reminding customers to consider the 
potential tax benefits of investing in the 
plan of their home state. 
c. Combined use of standardized and 
transaction-specific cost disclosure. 
Costs associated with investments in 
covered securities would be shown 
using standardized $1,000, $50,000 and 
$100,000 payment or investment 
amounts. In addition, if a customer 
requests at the point of sale, broker-
dealers would be required to use ‘‘fill in 
the blank’’ boxes to disclose cost 
information reflecting the customer’s 
anticipated payment amount.
17
d. Presentation of sales fee disclosure. 
Based on the standardized payment 
amounts (for securities with an upfront 
sales fee)
18
or investment amounts (for 
other securities), broker-dealers would 
be required to disclose on the forms 
sales fees in dollars and as a percentage 
of the amount invested.
19
For securities 
with an upfront sales fee, the forms 
would contain an additional column for 
the net amount invested. Broker-dealers 
would be required to disclose the back 
end sales fee on the form as a 
‘‘maximum’’, reflecting the highest back 
end fee a customer could expect to pay 
if the investment did not appreciate or 
depreciate.
20
Broker-dealers would also 
be required to disclose on the forms a 
brief statement about the possible 
availability of breakpoint discounts, 
referred to on the forms as ‘‘volume 
discounts.’’
e. Comprehensive annual cost 
disclosure. In the Proposing Release, we 
proposed to require broker-dealers to 
disclose only distribution-related costs. 
However, in response to the comments 
and investor testing described above, we 
now propose to require broker-dealers to 
disclose on the proposed new forms 
comprehensive information about all 
the costs of owning the securities 
subject to disclosure, including 
investment company costs such as 
‘‘management fees’’ and ‘‘other 
expenses’’ that are disclosed in the 
prospectus. The disclosure of those 
costs would be made in both dollar 
terms and as a percentage of investment 
value. Because our investor testing 
showed that disclosure of costs appears 
to be most effective when all the 
components of the costs are identified, 
broker-dealers would be required to 
show the breakdown of annual costs by 
category. In addition, they would be 
required to disclose any flat annual fees, 
such as the account fee illustrated on 
Attachment 1. 
f. Disclosures tailored to share class 
and pricing structure. Broker-dealers 
would be required to tailor point of sale 
disclosures to reflect particular share 
classes or other pricing structures that 
are applicable to a contemplated 
purchase. Accordingly, point of sale 
disclosure would be required for all 
share classes and pricing structures, not 
just the front-end, back-end, and ‘‘level 
load’’ structures set forth in the 
attachments (commonly referred to as A, 
B, and C share classes). Broker-dealers 
selling any other share classes or pricing 
structures would be required to provide 
the applicable disclosures from the 
attached forms.
g. Disclosure of all share classes 
under consideration. A broker-dealer 
would have to provide point of sale 
information with regard to all share 
classes that are under consideration at 
the point of sale, including share classes 
other than the typical A, B, and C share 
classes. 
h. Disclosure of revenue sharing 
arrangements. Broker-dealers would be 
required to disclose the existence of 
revenue sharing payments they receive 
for promoting covered securities as a 
conflict of interest. Consistent with the 
proposed Internet disclosure 
requirements discussed below, broker-
dealers would also be required to 
disclose on the point of sale forms an 
Internet Web site and a toll-free 
telephone number customers can use to 
find more detailed information about 
disclosures of those payments, 
including the amounts of, and sources 
of, the payments.
21
i. Disclosure of special incentives to 
broker-dealer sales personnel. Broker-
dealers would be required to disclose 
the fact, if true, that they pay their 
personnel proportionately more for 
selling the covered security than for 
others (i.e., whether they pay 
differential compensation) or for selling 
certain share classes over others.
22
The 
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10525Federal  Register/ Vol.  70,  No.  42 / Friday,  March  4,  2005 / Proposed  Rules  
and the risk that such disclosure either would 
invariably lead to a ‘‘yes’’ answer or else would be 
too unwieldy at the point of sale. See Proposing 
Release n. 105.
23
As with disclosure of revenue sharing 
payments, investors in general expressed more 
interest in information about costs they would pay 
than in information about how broker-dealers were 
compensated. Accordingly, the forms would not 
require disclosure of the standard dealer concession 
that broker-dealers receive to sell the covered 
security. As discussed below in part IV, Internet-
based disclosure may be a preferable means for 
giving customers quantified information about how 
their brokers are being compensated. 
Because we prohibited the use of brokerage to 
promote distribution in September 2004, point of 
sale disclosure of information about portfolio 
brokerage commissions no longer would be 
necessary. See Investment Company Act Release 
No. 26591 (Sept. 2, 2004), 69 FR 54728 (Sept. 9, 
2004). The NASD has adopted a corresponding 
amendment to its rules governing broker-dealers, 
and NASD rules for several years have prohibited 
member broker-dealers from favoring or disfavoring 
any fund based on expected brokerage 
commissions. See Securities Exchange Act Release 
No. 50883 (Dec. 20, 2004), 69 FR 77286 (Dec. 27, 
2004).
forms would inform investors of where 
to find out more detailed disclosures of 
broker compensation and the special 
incentives paid to sales personnel for 
selling certain funds over others.
23
j. Reference to the fund prospectus as 
the primary source of information about 
the fund. Broker-dealers would be 
required to include a statement that 
customers should consider all costs, 
goals and risks before purchasing a 
covered security, direct customers to the 
security’s prospectus or official 
statement for more information, and 
inform customers that the broker-dealer 
can provide those documents, including 
the disclosure regarding special 
incentives. 
k. Permissive omission of categories 
where no information is applicable. 
Broker-dealers would be able to omit 
any categories of information that are 
not applicable. For example, if the 
disclosure on the forms about a conflicts 
of interest is ‘‘NO,’’ broker-dealers 
could, but are not required to, omit that 
disclosure. 
3. Request for Additional Comments 
Would the proposed new point of sale 
disclosure forms outlined above and 
attached improve decisionmaking by 
providing investors with the right 
information about covered securities 
prior to purchasing those securities? 
Commenters are invited to discuss the 
effectiveness of the proposed point of 
sale disclosure forms in Attachments 1–
6 and to suggest alternatives and 
modifications. Commenters specifically 
are invited to discuss: 
Q. Clarity of the forms. Do the 
proposed new forms in Attachments 1–
6 strike an appropriate balance between 
the use of plain English and the need for 
specific disclosure of information about 
the costs and conflicts associated with 
purchases of covered securities? Is the 
terminology used in the forms easily 
understandable? If not, how should it be 
modified? For example, should the 
disclosure of annual fees on the forms 
include the term ‘‘12b–1 fee’’ to refer to 
annual distribution and service fees 
paid to broker-dealers for selling a 
covered security? Should the disclosure 
of conflicts of interest on the forms 
include the term ‘‘revenue sharing,’’ so 
that investors may connect the 
information on the forms with 
information they receive through other 
disclosure documents or the media? 
Would the use of the terms ‘‘12b–1 fee’’ 
and ‘‘revenue sharing’’ be confusing? If 
so, what other terms are appropriate 
substitutes? Also, are there other terms 
that should be included on the forms? 
•Is it appropriate for the Commission 
to mandate the format of the forms, 
including font size and layout? If the 
format of the forms is not mandated, is 
it likely, either intentionally or 
unintentionally, that broker-dealers 
would obscure the information being 
disclosed?
•Should the forms contain a ‘‘date 
line’’ where the broker-dealer would be 
required to fill in the date when the 
point of sale disclosures were 
communicated to the investor? Would 
such a requirement aid in assuring 
compliance with the rule? For point of 
sale information delivered orally, 
should broker-dealers be required to 
notify the customer that the information 
is current as of the date of disclosure? 
•Should the forms contain a 
‘‘signature line’’ which customers 
would be required to sign to evidence 
receipt of the point of sale disclosures? 
Would such a requirement aid in 
assuring compliance with the rule? 
Could it cause broker-dealers to make 
point of sale disclosures later in the 
selling process in order to avoid having 
customers sign multiple disclosure 
forms? How would such a ‘‘signature 
line’’ requirement be implemented for 
oral point of sale disclosures? 
Q. Identification of security subject to 
disclosure. Do the attached proposed 
forms appropriately set forth the 
covered security’s issuer and class or 
pricing structure, ticker symbol (if 
applicable), and other portfolio or fund 
designations as necessary to identify the 
security and differentiate it from the 
issuer’s other securities? 
•In a transaction involving a 529 
savings plan interest or variable 
insurance product, point of sale 
disclosure would be required to 
encompass costs related to a number of 
underlying securities (such as 12b–1 
fees imposed at the level of the 
underlying security), and conflicts 
related to underlying securities (such as 
revenue sharing paid for distribution of 
those securities). Should broker-dealers 
be required to inform investors that the 
information being disclosed reflects 
costs and conflicts arising from 
securities underlying the covered 
security that is being directly 
purchased, as well as the costs and 
conflicts directly applicable to the 
covered security? Should broker-dealers 
also be required to disclose the identity 
of the securities underlying the covered 
security that is being directly 
purchased? Are there certain 
circumstances where such disclosure 
should be required, such as when that 
information is not otherwise available? 
•For interests in a 529 savings plan, 
should broker-dealers be required to 
identify a specific age-based portfolio or 
other portfolio within the plan, to the 
extent a specific portfolio has been 
identified at the point of sale? 
Alternatively, if the underlying portfolio 
has not been identified at the point of 
sale, should the broker-dealer be able to 
provide a disclosure document setting 
forth maximum costs (i.e., maximum 
sales fee and maximum annual 
ownership costs) associated with all 
portfolios underlying the plan? To what 
extent do investors purchase interests in 
529 plans without already having 
identified the underlying portfolio for 
the investment? If the state sponsoring 
a plan is not otherwise identified, 
should the broker also be required to 
disclose the name of the state in order 
to help customers determine whether 
they may be entitled to state tax 
deductions or other benefits for 
investing in that state’s plan? 
•Some states offer state tax benefits 
for investments in the 529 savings plans 
they sponsor. If residents of those states 
invest in a different state’s 529 savings 
plan, they generally would not be 
eligible to receive the state tax benefits. 
Attachments 4–6 include a brief text 
reminding customers to consider the 
potential tax benefits of investing in a 
plan sponsored by their home state. Is 
this disclosure appropriate? Should it be 
modified, narrowed, or expanded? 
Q. Combined use of standardized and 
transaction-specific cost disclosure. The 
proposed new forms would combine 
disclosure of standardized information 
with disclosure of transaction-specific 
information upon customer request, or 
in accordance with a broker-dealer’s 
standard practice. Does this approach 
appropriately balance the cost savings of 
standardized disclosure with the 
effectiveness of transaction-specific 
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10526Federal  Register/ Vol.  70,  No.  42 / Friday,  March  4,  2005 / Proposed  Rules  
disclosure? Should the Commission 
require that the brokers disclose 
transaction-specific information in all 
situations, and not just upon request? 
Alternatively, are there certain 
situations or products for which 
transaction-specific information should 
always be required? 
Q. Presentation of sales fee disclosure. 
Would the disclosure of upfront sales 
fees in the forms in Attachments 1–6—
with separate columns for payment 
amount, fee in dollars, investment and 
fee as a percentage of net investment—
effectively communicate information 
about the amount of those fees and their 
immediate impact on investment? If not, 
how should the forms be modified? 
Would it be appropriate to exclude the 
impact of letters of intent, rights of 
accumulation, purchases by related 
parties, or other customer-specific 
discounts, in light of the additional 
costs and complexity that could be 
associated with their inclusion? 
•For disclosure of upfront sales fees, 
should the ‘‘investment amount’’ equal 
the customer’s payment less the amount 
of the sales fee? Should other fees, such 
as broker-imposed commissions or 
purchase fees, be deducted to determine 
the ‘‘investment amount’’? 
•Would the proposed disclosure of 
deferred sales fees in the forms—with 
separate columns for investment 
amount, maximum fee in dollars and fee 
as a percentage of investment amount—
effectively communicate information 
about the potential amount of those 
fees? Would focusing on maximum 
amounts of those fees, rather than 
providing year-by-year breakdowns, 
effectively convey information about 
those fees’ potential impact? 
Q. Comprehensive annual cost 
disclosure. Would the proposed method 
of disclosing comprehensive annual 
costs in the forms in Attachments 1–6—
with separate columns for investment 
amount and fees in dollars and fee as a 
percentage of investment amount—
effectively communicate illustrative 
information about the potential amount 
of, and likely variations in, those costs? 
Would the proposed new point of sale 
disclosure forms adequately put 
investors on notice that the disclosed 
amount of the annual costs are 
illustrative, and that actual amounts are 
likely to vary? Should the forms include 
a statement that such annual costs 
would not be directly taken out of the 
investor’s accounts—and would not be 
subject to separate disclosure as they are 
incurred—but rather would 
continuously be paid out of the assets of 
the funds the investor has purchased 
(including underlying funds in two-
tiered 529 savings plan interests and 
variable insurance products)? 
•Should point of sale disclosure 
include all the costs to the investor 
associated with owning covered 
securities (including mutual fund 
management and other costs), and not 
only distribution costs? If not, what 
costs should be included? Commenters 
are also invited to discuss whether 
investors perceive the economic impact 
of costs differently based on whether 
costs are charged directly or indirectly 
(i.e., fees that are deducted from fund 
assets). 
•Should we require each category of 
annual fee to be separately quantified in 
percentage terms, as set forth in the 
proposed new forms? Should we require 
the aggregate of those annual ownership 
fees also to be quantified in dollar terms 
(based on the potential quantification 
standards discussed above)? Are there 
better ways to inform investors about 
the scope of those costs in dollar terms 
and to help investors understand the 
economic consequences of annual fees 
on an investment? 
•Should point of sale disclosure set 
forth information about account fees 
that issuers may charge to typical 
investors in the covered security (other 
than fees that apply only in limited 
circumstances, such as returned check 
fees)? Should such account fees be 
expressed as a fixed dollar amount and/
or as a percentage of assets (whichever 
is applicable)? If fees are applied only 
on accounts that are valued below a 
specified amount, should this threshold 
amount be disclosed? Commenters are 
also invited to discuss how disclosure of 
such fees could be expected to influence 
customers’ decisions to purchase 
covered securities. Commenters also are 
invited to identify other fees that should 
be disclosed at point of sale, and discuss 
how disclosure could be done 
effectively.
•We also invite comment on the 
costs associated with providing dollar 
quantification of comprehensive fees, 
including the extent to which disclosure 
of transaction-specific information upon 
a customer’s request would increase 
compliance costs. 
•We note that the approach 
discussed here would require broker-
dealers to make certain disclosures 
based on estimates, such as estimates of 
future first year ownership costs 
calculated with a total annual fee 
percentage that is derived from expense 
ratios reported in the current 
prospectus. The dollar estimates of 
those future first year costs also would 
be based on the assumption that the net 
asset value of an investment would not 
change during the first year following 
the investment. Broker-dealers would be 
required by rule to deliver those 
estimates, even though future outcomes 
may well differ from the estimates. 
Should the Commission address 
concerns about exposure to unfair 
private actions, for example, by 
requiring additional disclosures or 
providing a safe harbor? We would not 
expect private rights of action to result 
from non-fraudulent disclosures under 
the rule even if, for example, a broker-
dealer erred by negligently transposing 
numbers between information in the 
prospectus and information reported at 
the point of sale. 
Q. In addition to disclosing cost 
information category-by-category (e.g., 
sales fees and annual ownership costs), 
should point of sale disclosure also 
depict ownership costs on an aggregate 
basis? Alternatively, should aggregate 
information be disclosed in lieu of 
category-by-category disclosure? Mutual 
fund prospectuses are required to 
estimate the total expenses associated 
with a $10,000 investment over one, 
three, five and ten year time horizons, 
based on an assumed five percent return 
and other assumptions. Those estimates 
help investors quantify the combined 
impact of disparate ownership costs 
such as sales fees and ongoing 
ownership costs. Those estimates also 
facilitate comparisons among share 
classes and funds. Would point of sale 
disclosure of information that similarly 
quantifies the aggregate impact of 
multiple cost categories provide a useful 
supplement to, or replacement for, 
category-by-category disclosure of 
ownership costs? If so, should 
disclosures of aggregate information 
reflect a range of investment amounts 
(such as $1,000, $50,000 and $100,000), 
consistent with other cost disclosures 
on the written point of sale form? On 
the other hand, would disclosure of 
aggregate cost information as a 
supplement to category-by-category 
information potentially confuse some 
investors by leading them to believe that 
those aggregate costs would be incurred 
in addition to other disclosed costs, 
rather than being an alternative way of 
expressing those costs? Would 
disclosure of aggregate information as a 
supplement to category-by-category 
information threaten to pose 
‘‘information overload’’ that would 
reduce some investors’’ use of point of 
sale disclosure? Would aggregate 
information be suitable as a replacement 
for disclosure of category-by-category 
information? Alternatively, would 
aggregate information be inadequate as 
a replacement for category-by-category 
information? For example, would 
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10527Federal  Register/ Vol.  70,  No.  42 / Friday,  March  4,  2005 / Proposed  Rules  
24
Disclosure of aggregate cost information also 
may facilitate the disclosure and use of comparative 
information at the point of sale. That is because it 
may be easier for many investors to weigh a single 
aggregate cost amount against the benchmark posed 
by the aggregate cost average and range for 
alternative funds, than it would be to separately 
weigh the comparative context of upfront sales fees, 
deferred sales fees and annual ownership costs. As 
discussed above, we expect to address possible 
requirements for disclosure of comparative 
information in a later release.
25
Other pricing structures would include 
purchase and redemption fees some funds charge 
and which are paid into fund assets rather than for 
distribution.
26
For example, in the Proposing Release the 
Commission set forth a generic point of sale form 
that was not specific to any particular share class 
or pricing structure.
27
Such an approach would be an alternative to 
the proposed requirement that the broker-dealer 
identify payments received from persons within a 
‘‘fund complex’’, including affiliates of the fund but 
not the fund issuer.
28
While a commenter has suggested that the 
revenue sharing disclosure requirement be limited 
to payments ‘‘in connection with’’ the sale or 
distribution of covered securities, such an approach 
may inject too great an element of subjectivity into 
the disclosure requirement, by permitting a broker-
dealer to characterize a particular payment as not 
distribution-related, and claim no need to disclose 
it. It may be more effective to implement an 
approach that requires disclosure of the types of 
payments that can be expected to compensate 
broker-dealers for distribution, and that does not 
reach to other payments.
29
As defined in the Proposing Release, the dealer 
concession consists of fees earned by the broker-
dealer at the time of sale from the issuer or its agent, 
the distributor or another broker-dealer.
30
The point of sale rules propose an exception for 
underwriters. Even if a targeted underwriter 
exclusion were adopted, however, such a carve-out 
might be inappropriate at times, such as when an 
underwriter is broker of record on an ‘‘orphan’’ 
account originated by another broker-dealer.
aggregate information fail to explicitly 
inform investors about the types and 
timing of ownership costs that they 
would incur if they purchase a covered 
security? Further, would aggregate 
information be inadequate because its 
accuracy depends on the accuracy of 
underlying assumptions? Commenters 
are invited to suggest models by which 
aggregate cost information could be 
disclosed clearly on written point of 
sale forms as a supplement to, or a 
replacement for, category-by-category 
information.
24
Q. Disclosures tailored to share class 
and pricing structure. Should the 
Commission adopt separate forms for all 
share classes and pricing structures?
25
 
In the alternative, should the 
Commission adopt an additional form 
that would permit disclosure of all 
potential costs for all share classes and 
pricing structures of mutual fund and 
529 savings plan investments, including 
purchase and redemption fees that are 
paid into fund assets?
26
How could 
disclosure of the costs of owning classes 
of covered securities that are not 
illustrated by one of the forms attached 
as Attachments 1–6 (or funds with 
different pricing structures than those 
illustrated) be efficiently implemented?
•Do the proposed new forms 
appropriately require disclosure of 
information about fees customers must 
pay upon purchase or redemption that 
are retained in fund assets (as distinct 
from sales loads and commissions that 
are paid to broker-dealers)? Should the 
required disclosure of redemption fees 
reflect the duration of such redemption 
fees? Should this type of disclosure be 
required to be quantitative or narrative, 
depending on the fee being disclosed? 
For example, should redemption fees 
imposed on short-term holdings (such 
as holdings of 180 days or less) be 
disclosed in narrative terms, with other 
redemption fees disclosed the same way 
that back-end sales loads would be 
disclosed (consistent with the 
quantification standards discussed 
above)? Should it include other 
information about other costs of owning 
covered securities not otherwise 
required to be disclosed in our proposed 
rules and forms, such as the one-time 
application fees that some states charge 
upon initial investments in their 529 
savings plan interests? Is the placement 
of the disclosure of the application fee 
on the B and C class disclosures for 529 
plans appropriate? 
Q. Disclosure of all share classes 
under consideration. Would it be 
appropriate to require a broker-dealer to 
provide point of sale information with 
regard to all share classes that are under 
consideration at the point of sale? 
Q. Disclosure of revenue sharing 
payments. Do the point of sale 
disclosure forms in Attachments 1–6 
provide sufficient information about 
revenue sharing arrangements, 
including where to find more detail 
about those arrangements, to inform 
customer’s investment decisions? In 
light of concerns expressed by 
commenters, including investors, that 
complex disclosures potentially could 
distract investors from other important 
information, is it appropriate to omit the 
sources and amounts of revenue sharing 
payments received by the broker-dealer 
from point of sale disclosures and 
require them instead to be disclosed on 
the Internet and made available to 
customers upon request through a toll-
free number? On the other hand, 
investors may find this information 
useful at the point of sale. Should we 
require the disclosure of the source and 
amount of revenue sharing payments at 
the point of sale? Commenters are 
invited to discuss how revenue sharing 
information can be disclosed simply 
and efficiently. 
•Should the requirement to disclose 
the existence of revenue sharing 
payments focus on payments, either to 
a broker-dealer or its affiliate, that are 
directly or indirectly funded by some or 
all of the following: an investment 
adviser; a principal underwriter; and an 
administrator or transfer agent of the 
issuer of the covered security (and of 
issuers of underlying securities with 
regard to two-tiered products)?
27
 
Should the disclosure requirement 
extend to payments from issuers and/or 
from other parties not specifically 
identified above?
28
Would such a 
requirement be adequate to prevent 
evasion of the proposed disclosure 
obligation? The revenue sharing 
disclosure obligation set forth in the 
Proposing Release focused on payments 
received from persons ‘‘within the fund 
complex.’’ Under this targeted approach 
to disclosure of revenue sharing 
payments, would it be appropriate to 
eliminate the definition of ‘‘fund 
complex’’?
•Should the proposed definition of 
‘‘revenue sharing’’ be replaced by a 
definition of ‘‘promotional payment’’ to 
more accurately reflect the nature of 
such payments? If the required 
disclosure were to be targeted, as 
discussed above, to payments received 
from investment advisers, principal 
underwriters, administrators or transfer 
agents, should the definition of either 
‘‘revenue sharing’’ generally encompass 
payments from an investment adviser, 
principal underwriter, administrator or 
transfer agent to a broker-dealer or 
associated person? Should payments 
that constitute dealer concessions be 
excluded from the definition because 
dealer concessions do not raise the same 
conflicts as special compensation 
arrangements, which warrant special 
disclosure?
29
Should payments funded 
by asset-based distribution fees (such as 
rule 12b–1 fees) be excluded because 
they would be included elsewhere in 
the point of sale disclosure? Should 
payments that represent compensation 
for providing services as a principal 
underwriter of a covered security be 
included or do those payments not pose 
the same conflicts of interest?
30
Should payments to an issuing 
insurance company from funds 
underlying variable insurance products 
be included? What conflicts do these 
payments pose? Would other inclusions 
or exclusions be appropriate? 
•If the revenue sharing disclosure 
were targeted, as discussed above, 
should the required disclosure exclude 
payments made ‘‘solely in connection’’ 
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10528Federal  Register/ Vol.  70,  No.  42 / Friday,  March  4,  2005 / Proposed  Rules  
31
Such a definition would be consistent with 
other securities laws provisions that identify 
investment company affiliates in part depending on 
whether two companies hold themselves out as 
related companies. See, e.g., Exchange Act rule 
15a–6 (defining term ‘‘family of investment 
companies’’ in part based on whether registered 
investment companies that share the same 
investment adviser or principal underwriter ‘‘hold 
themselves out to investors as related companies for 
purposes of investment and investor services’’); 
Investment Company Act rule 11a–3 (defining term 
‘‘group of investment companies’’ in part based on 
whether registered open-end investment companies 
hold themselves out to investors as related 
companies for purposes of investment and investor 
services).
32
Securities activities by banks are subject to a 
different regulatory regime, so long as the banks 
meet applicable exceptions and exemptions from 
the definitions of ‘‘broker’’ and ‘‘dealer’’ set forth 
in Sections 3(a)(4)(B) and 3(a)(5)(B) of the Exchange 
Act and the rules thereunder. See also Securities 
Exchange Act Release No. 50618 (Nov. 1, 2004) 
(order extending temporary exemption of banks, 
savings associations, and savings banks from the 
definition of ‘‘broker’’ under Section 3(a)(4) of the 
Exchange Act).
33
For example, would it be reasonable to 
conclude that payments received by an associated 
person (including a second broker-dealer or a bank) 
are solely in connection with the distribution 
activities of a second broker-dealer or a bank—and 
hence to fall within such an exclusion—if the 
payments are comprised of transaction-based 
streams that are linked solely to transactions 
effected by that other broker-dealer or bank, or if the 
payments are comprised of asset-based streams that 
are linked solely to assets held by customers of that 
other broker-dealer or bank?
34
For instance, if the disclosing broker-dealer and 
the affiliated broker-dealer each have sold roughly 
the same amount of covered securities on behalf of 
the fund complex in the past year, and the two 
broker-dealers each received roughly the same 
amount of such miscellaneous payments, then 
would it be reasonable for the disclosing broker-
dealer to conclude that the miscellaneous payments 
received by the affiliated broker-dealer were solely 
in connection with the affiliated broker-dealer’s 
distribution activities? If, in contrast, the affiliated 
broker-dealer received materially more of those 
miscellaneous revenue sharing payments then the 
disclosing broker-dealer, while relative sales still 
were roughly the same, then would the disclosing 
broker-dealer reasonably have to inform the 
customer about those payments?
with securities issued by a person that 
is not a ‘‘related issuer’’ of the issuer of 
the covered security? If so, would a 
definition of ‘‘related issuer’’ 
appropriately encompass the issuer of 
the covered security (and underlying 
securities in the case of two-tiered 
products), and the issuers of other 
covered securities that hold themselves 
out as related companies for purposes of 
investment or investor services, as well 
as other affiliated issuers?
31
Would 
there be better ways of excluding 
payments that are intended to promote 
the sale of a covered security other than 
the security that the customer is 
considering purchasing?
•If the required revenue sharing 
disclosures were targeted in such a way, 
should the disclosure requirement 
further exclude payments received by 
an associated person if the broker-dealer 
making the disclosure reasonably 
determined that the associated person 
received those payments solely in 
connection with the distribution of 
covered securities by a different broker-
dealer or by a bank?
32
Are there other 
ways of excluding payments to affiliates 
that would not pose conflicts of interest 
for the broker-dealer and would pose 
fewer compliance challenges? Would 
such an exclusion for payments 
received by affiliates that are linked 
solely to a second broker-dealer’s 
distribution activities be justified in part 
by the expectation that the second 
broker-dealer would be required to 
provide point of sale disclosures to put 
its own customers on notice of those 
payments? Should such an exclusion 
apply if payments received by an 
affiliate are not solely linked to the 
distribution activities of a second 
broker-dealer or a bank?
•If payments received by an affiliate 
of a broker-dealer would not have to be 
disclosed if they are ‘‘solely connected’’ 
with the distribution activities of 
another broker-dealer or a bank, what 
facts and circumstances should a 
broker-dealer have to consider to 
determine whether revenue sharing 
received by an affiliate are in fact 
‘‘solely connected’’ with the distribution 
activities of another broker-dealer or a 
bank?
33
In the case of payments that do 
not represent transaction-based or asset-
based payment streams, such as 
payments that are designated as 
compensation for seminar sponsorship, 
should the broker-dealer be permitted to 
avoid having to disclose payments 
received by an affiliated broker-dealer if 
the payments that it receives and the 
payments that the affiliated broker-
dealer receives are reasonably 
proportional to the relative size of the 
two broker-dealers’ distribution 
activities?
34
•Would such a comprehensive 
alternative to revenue sharing 
disclosure, including the possible 
elimination of the definition of ‘‘fund 
complex,’’ adequately exclude payments 
that a broker-dealer receives in 
connection with underwriting 
municipal bonds? 
•Is the description in the attached 
forms of the conflict that arises as a 
result of revenue sharing arrangements 
readily understandable? If not, how 
should it be modified? Should the term 
‘‘revenue sharing’’ be explicitly stated in 
the description of the conflict or would 
this term be confusing? 
Q. Disclosure of special incentives to 
broker-dealer sales personnel. Broker-
dealers would be required to disclose on 
the proposed new forms, if true, that 
sales personnel are paid more for selling 
the covered security over other 
securities. Is this disclosure 
appropriate? Is it useful to investors? Is 
the language used to describe this 
conflict of interest appropriate? Should 
point of sale disclosure of differential 
compensation practices cover situations 
in which securities pay a relatively high 
dealer concession or commission to the 
broker-dealer, rather than only the 
situation where a broker-dealer provides 
an extra financial incentive to its sales 
personnel for selling a covered security? 
•In light of concerns expressed by 
commenters that overly complex 
disclosures could distract investors from 
other important information, is it 
appropriate and helpful to omit 
quantified information about dealer 
concessions from point of sale 
disclosures and require it instead to be 
disclosed on the Internet, as discussed 
below? 
•In addition, the attached forms for 
class B and class C shares would require 
disclosure of the fact, if true, that sales 
personnel are paid more for selling 
those classes of securities than class A 
shares. Is this disclosure appropriate? Is 
it helpful to investors? Should it appear 
on the forms for other classes of shares? 
•Do the references pointing investors 
to the broker-dealer’s Web site for more 
information about ‘‘special incentives’’ 
adequately inform investors of where 
they can find more details about 
revenue sharing payments? Should 
other terms be used, such as ‘‘extra 
incentives’’ or ‘‘conflicts of interest’’? 
Q. References to the fund prospectus 
as the primary source of information 
about the fund. Would the approach for 
disclosure of other information on the 
forms in Attachments 1–6 (apart from 
ownership costs and conflicts of 
interest), such as the fact that investors 
should take other factors into account 
when making investment decisions, 
strike a reasonable balance between 
disclosure that is easy to understand 
and disclosure that is appropriately 
comprehensive? 
Q. Permissive omission of categories 
where no information is applicable. 
Would it be appropriate to permit 
broker-dealers to omit categories of 
information that are not applicable, or 
should disclosure of such categories be 
required to promote comparability? 
Should conflict of interest information 
be presented in all situations to provide 
investors with full conflict information 
about all funds they are considering? 
Should some sections be required to be 
omitted if inapplicable, such as sections 
on upfront fees for forms for variable 
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10529Federal  Register/ Vol.  70,  No.  42 / Friday,  March  4,  2005 / Proposed  Rules  
35
As discussed more fully below, we are 
considering ways to combine written and oral point 
of sale disclosure. We would expect any written 
disclosure supplementing oral point of sale 
disclosure to be provided contemporaneously.
36
Under the latter type of arrangement, the 
broker-dealer would not be able to ‘‘round up’’ the 
standardized disclosure amount to reduce the 
apparent percentage sales fee communicated 
through oral disclosure. For example, if the 
anticipated amount of the payment is $85,000, 
standardized information with regard to a $50,000 
model payment may be more appropriate for 
disclosure of upfront sales fees than standardized 
information with regard to a $100,000 model 
payment, if the $50,000 model more accurately 
depicts the percentage sales fee associated with the 
customer’s anticipated payment.
37
Such an alternative would not permit a broker-
dealer to require a customer to ‘‘opt into’’ point of 
sale disclosure, but simply would allow a customer 
to affirmatively ‘‘opt out’’ of such disclosure.
38
See Proposing Release, n. 155 (discussing the 
impact of rounding).
annuities that do not charge them? 
Would disclosure of some inapplicable 
information (for example, the fact, if 
true, that a broker-dealer is not paid 
extra for promoting one fund over 
others) serve to educate investors, or 
enhance their understanding of the 
remaining disclosure?
•In addition, would it be appropriate 
to permit broker-dealers to omit all 
point of sale information, thereby 
eliminating all point of sale disclosures, 
in circumstances where there are no 
distribution-related expenses or 
conflicts of interest required to be 
disclosed at the point of sale? Would 
such an approach create a competitive 
advantage for funds that take advantage 
of such an exception? Would any such 
advantage be appropriate? 
B. Oral Disclosure of Point of Sale 
Information 
Commenters expressed a variety of 
views about the proposed requirement 
for point of sale information to be 
disclosed orally when the point of sale 
occurs through means of oral 
communication other than at an in-
person meeting (such as through a 
telephone conversation). Some 
consumer advocates questioned whether 
oral disclosure ever would be 
appropriate in light of difficulties 
associated with monitoring compliance 
and the need to give investors the 
opportunity to consider the point of sale 
information when making investment 
decisions. Some securities industry 
commenters suggested replacing oral 
disclosure with Internet-based 
alternatives or after-the-fact disclosure. 
Others stated that a verbatim reading of 
the point of sale form would not be 
practical and that disclosure of 
summary information should be 
sufficient. Commenters also stated that 
customers should be able to opt out of 
disclosure in certain circumstances, 
such as when orders are placed through 
automated telephone systems. 
As the comments indicate, oral point 
of sale disclosure poses special 
challenges given the difficulty that 
could be associated with hearing 
complex information without 
simultaneously seeing it. However, we 
are concerned that Web site disclosure 
or after-the-fact disclosure could be 
ineffective at providing investors with 
key information about costs and 
conflicts contemporaneous with 
investment decisions as point of sale 
disclosure. Moreover, we are concerned 
that requiring broker-dealers to provide 
all point of sale disclosures in writing 
prior to accepting an order might 
preclude investors from purchasing 
mutual funds and related securities over 
the telephone without undue delay.
35
In light of these concerns, we believe 
that one possible way to make oral point 
of sale disclosure more effective could 
be to require broker-dealers to provide 
oral point of sale information that is 
either: (A) Quantified to reflect the 
anticipated amount of the purchase; or 
(b) quantified to reflect a standardized 
purchase amount—$1,000, $50,000 or 
$100,000—that would be appropriate 
based on the customer’s anticipated 
payment and the fee schedule of the 
covered security (or $1,000 if that 
amount is not readily estimable), 
supplemented by transaction-specific 
quantification upon the investor’s 
request.
36
A second possibility could be to 
clarify that oral disclosure would not 
require a verbatim reading of the written 
disclosure form. Instead, in addition to 
the quantitative information discussed 
above, broker-dealers would be required 
to provide summary qualitative 
information about whether they receive 
revenue sharing payments or engage in 
differential compensation practices, as 
well as to disclose other information 
useful to investors (some of which are 
suggested in the questions below). This 
could include requiring disclosure that 
they are required to provide transaction-
specific quantified information upon the 
customer’s request (if such transaction-
specific information has not been 
provided as a matter of course). Under 
such an approach, broker-dealers would 
be able to omit categories of costs that 
are not applicable to a contemplated 
purchase. 
A third possibility could be to permit 
a broker-dealer using an automated 
telephone system to receive customer 
purchase orders to program the system 
to convey the required point of sale 
information about sales fees and then 
allow customers to elect not to listen to 
information, other than about sales fees, 
that otherwise would have to be 
disclosed in a written disclosure 
document. Such an exception could 
accommodate the preference of some 
investors not to hear point of sale 
information, while helping to ensure 
that investors at a minimum are 
provided with information about sales 
fees. This alternative would not appear 
appropriate when a customer 
communicates with a natural person 
associated with a broker-dealer as part 
of the process of placing an order 
because, in these circumstances, the 
natural person would be well positioned 
to provide disclosure and respond to 
investor questions.
37
Request for comment. The 
Commission generally seeks comment 
on oral point of sale disclosure. To make 
oral point of sale disclosure more 
effective, should the Commission adopt 
one of the alternatives outlined above, 
or some combination of the alternatives? 
Would any of the alternatives be more 
effective than others? Would some 
combination of the alternatives be 
effective? Should the Commission 
require the broker-dealer to provide an 
investor a written copy of the disclosure 
form following each oral conversation? 
Should that disclosure be limited to an 
oral conversation that results in the 
customer placing an order? Are there 
other alternatives not discussed above 
that would make oral point of sale 
disclosure more effective? Commenters 
specifically are invited to address:
Q. Would the proposed revised 
quantification standards for oral 
disclosure better permit investors to 
obtain sufficient information about the 
costs of owning covered securities than 
our original proposal? Would this 
approach provide investors with a 
reasonable amount of specificity 
without ‘‘information overload’’? If not, 
what other approaches should the 
Commission consider? Are disclosures 
based on standardized $1,000, $50,000 
or $100,000 amounts appropriate? 
Would different or additional 
standardized amounts be appropriate 
(e.g. $10,000)? Should we adopt 
additional requirements to inform 
customers that the costs they may incur 
may be different than those disclosed at 
the point of sale due to the effects of 
rounding?
38
Q. When point of sale disclosure is 
made orally, would it be practical to 
require broker-dealers to disclose that 
they are required to provide transaction-
specific quantified information upon the 
customer’s request (if such transaction-
specific information has not been 
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10530Federal  Register/ Vol.  70,  No.  42 / Friday,  March  4,  2005 / Proposed  Rules  
39
For example, an order-based trigger would not 
appear practical when a broker-dealer can solicit 
transactions and receive compensation without 
executing customer orders (such as may be present 
in so-called ‘‘check and application’’ arrangements), 
because in these circumstances the purchase may 
be completed before the soliciting broker-dealer is 
even aware of the order.
40
Some commenters have suggested that point of 
sale information should be disclosed only when a 
broker-dealer recommends a transaction, not when 
a customer places an unsolicited order. However, 
when a broker-dealer does not specifically 
recommend the securities it is selling, investors 
provided as a matter of course)? Would 
it lead to practical and effective 
disclosure if we were to require broker-
dealers to disclose that investors should 
consider all costs, goals and risks 
associated with potential investments 
before making purchases, and that 
related information is available in the 
applicable prospectus or official 
statement which the broker-dealer can 
provide to the customer? Would it lead 
to practical and effective disclosure if 
we were to require a broker-dealer to 
inform customers that they can inquire 
about special incentives that the broker-
dealer may receive to sell the covered 
security? If not, how should we require 
that a broker-dealer provide an investor 
with adequate disclosure about these 
special incentives? 
Q. If a customer is contemplating 
buying a security with an upfront sales 
fee, would it be appropriate and useful 
for the customer to receive disclosure 
that he or she may qualify for fee 
discounts if the customer or members of 
the customer’s family holds other shares 
from the fund family, or if the investor 
agrees to make additional purchases? 
Should broker-dealers have to disclose 
additional types of qualitative 
information? If so, what sort of 
information? For any such category of 
information, should the rules permit the 
broker-dealer to omit any disclosure 
conditioned on the broker-dealer’s 
providing the customer with additional 
information in writing at a later time? 
Should there be any other conditions a 
broker-dealer would have to meet before 
being able to do so? 
Q. Would it be useful to investors to 
require broker-dealers to disclose that 
investors should consider all costs, 
goals and risks associated with potential 
investments before making purchases, 
and that related information is available 
in the applicable prospectus or official 
statement which the broker-dealer can 
provide to the customer? Would it be 
useful to investors to require a broker-
dealer to inform customers that they can 
inquire about special incentives that the 
broker-dealer may receive to sell the 
covered security? If not, how should we 
require that a broker-dealer provide an 
investor with sufficient disclosure about 
these special incentives? 
Q. Would it be useful to investors if 
the Commission were to clarify that 
when providing oral disclosure a 
broker-dealer must provide summary 
qualitative information about whether a 
broker-dealer receives revenue sharing 
payments or engages in differential 
compensation practices? What other 
information would be useful to 
investors to receive if broker-dealers 
were permitted to summarize qualitative 
information? Are there compliance 
procedures that would help ensure that 
permitting broker-dealers to summarize 
qualitative information would not lead 
to situations where brokers obscure the 
information being disclosed? 
Q. Would it be appropriate to allow 
investors using automated telephone 
order systems to ‘‘opt out’’ of receiving 
certain oral point of sale disclosures? If 
so, what categories of information 
should be mandated and what 
categories subject to the opt-out right? If 
investors could opt out, would they still 
receive sufficiently helpful information 
to make an investment decision? Could 
an exception permitting customers to 
‘‘opt out’’ of oral point of sale disclosure 
for orders taken via automated 
telephone systems be subject to 
manipulation intended to deter delivery 
of point of sale disclosure? What 
limitations could minimize or eliminate 
this potential? Should we require 
broker-dealers to send written point of 
sale disclosures to customers who opt 
out of oral point of sale disclosures for 
orders taken via automated telephone 
systems? 
Q. Would it be helpful to investors 
who receive oral point of sale disclosure 
to receive both the quantitative 
information discussed above, as well as 
summary qualitative information about 
whether their broker-dealer receives 
revenue sharing payments or engages in 
differential compensation practices? Is 
there a minimum amount and/or type of 
information that should be mandated for 
oral point of sale disclosure? What 
should be the required key items to help 
investors make informed investment 
decisions? 
Q. Would it be appropriate to permit 
broker-dealers to make Internet-based 
disclosures or e-mail disclosures to 
those customers who consent to 
electronic delivery? Should Internet-
based or e-mail disclosures be made in 
the same format as that of the proposed 
point of sale disclosure forms? On what 
basis should the Commission permit a 
broker-dealer to do this? What 
limitations or procedures should apply 
to help ensure that customers actually 
receive written disclosures at the point 
of sale? 
C. Timing of Point of Sale Disclosure 
The proposed definition of ‘‘point of 
sale’’ would have determined the timing 
of disclosure through a two-tiered 
approach. In general, the proposed rule 
would have required disclosure 
‘‘immediately prior’’ to acceptance of 
the order. In circumstances in which a 
broker-dealer could solicit transactions 
and receive compensation without 
opening customer accounts or handling 
customer orders, however, disclosure 
would have to have been received upon 
initial communication with a customer. 
Consumer advocates stated that 
investors should receive disclosure 
earlier in the sales process to have 
adequate time to consider the 
information when making investment 
decisions. They suggested adding a 
time-of-recommendation component to 
trigger the disclosure. Some securities 
industry commenters suggested that 
point of sale disclosure could be 
provided most efficiently at the time of 
account opening. Some also indicated 
that the proposed communication-based 
standard would be difficult to 
implement and would lead to 
duplicative disclosure. 
The timing of point of sale disclosure 
is critically important, as investors 
should receive information early enough 
in the sales process to give them 
adequate time to consider the 
information, but not so early that they 
receive multiple disclosures for 
securities they may not be interested in 
purchasing. The timing of the point of 
sale trigger also should reflect the 
various ways in which customers may 
convey orders.
39
Request for comment. The 
Commission solicits comment on the 
timing of point of sale disclosure. 
Should the Commission adopt a revised 
‘‘point of sale’’ definition that would 
allow investors to receive disclosure 
earlier in the sales process than they 
would have in the initial proposal? If so, 
how should the Commission define the 
‘‘point of sale’’ to promote timely 
disclosure while minimizing 
implementation and compliance 
difficulties? Commenters are also 
requested to discuss the following 
issues relating to the ‘‘point of sale’’ 
definition:
Q. How could the general point of sale 
trigger be moved earlier in the sales 
process while remaining meaningful? 
For example, should it be based on the 
earlier of the time that a customer 
expresses a ‘‘preliminary intent’’ to 
purchase the covered security or the 
time that a broker-dealer recommends a 
covered security?
40
If so, should the 
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10531Federal  Register/ Vol.  70,  No.  42 / Friday,  March  4,  2005 / Proposed  Rules  
may wish to scrutinize whether the fees they are 
paying to the broker-dealer, and the rersulting 
reduciton in net investment and in return on their 
money, are justified by the relatively limited 
services they receive. Moreover, even absent an 
explicit recommendation, a broker-dealer can 
influence a customer’s investment decision through 
the way it presents investment options. Allowing 
disclosure to vary depending on whether a 
recommendation has occurred also may give some 
broker-dealers the incentive to inappropriately 
assert that they are not making recommendations 
when in fact they are.
41
We recognize that requiring earlier point of sale 
disclosure also may impact other proposed rule 
requirements. For example, one proposed provision 
of the point of sale rule states that orders would 
only be ‘‘indications of interest’’ prior to point of 
sale disclosure being provided. Some commenters 
criticized that provision as facilitating rescission 
based on ‘‘buyer’s remorse,’’ and as potentially 
promoting market timing. Some commenters also 
raised operational questions related to that 
provision, such as how trades would be unwound 
(including whether the issuer would have to enter 
into an offsetting trade or whether the broker-dealer 
would simply bear a monetary loss). An earlier 
point of sale trigger, in combination with other 
investor remedies for broker-dealer violations of 
securities regulations, may influence our 
consideration of whether explicit ‘‘indication of 
interest’’ language would be appropriate.
42
The proposed point of sale rule included an 
exception for periodic purchases.
43
Money market funds, including funds that may 
be purchased through brokerage ‘‘sweep’’ accounts, 
may bear asset-based distribution fees and may be 
associated with revenue sharing payments.
44
Does the inclusion of disclosure based on 
standardized purchase amounts help to address that 
potential problem?
45
NASD rules 2211(a)(3) and 3110(c)(4), in 
conjunction, designate the following persons as 
‘‘institutional investors’: (i) A bank, savings and 
loan association, insurance company, or registered 
investment company; (ii) an investment adviser 
registered with the Commission or with a state 
securities commission (or any agency or office 
performing like functions); (iii) any other entity 
Continued
standard for disclosure ‘‘immediately 
prior’’ to receipt of the order be retained 
as a backstop if disclosure otherwise is 
not provided earlier? What regulatory 
requirements or compliance procedures 
could help ensure that such an option 
would be treated as a backstop, rather 
than the primary option for timing the 
delivery of point of sale information?
41
Q. How could the point of sale trigger 
avoid disclosure gaps when a broker-
dealer solicits and is compensated for 
an order, but does not execute the 
order? In these circumstances, should 
the point of sale be the later of the time 
the broker-dealer ‘‘first communicates’’ 
with the customer about the covered 
security, or the time the customer 
expresses a ‘‘potential interest’’ in 
purchasing the covered security? Would 
other standards for the definition of 
‘‘point of sale’’ better provide timely 
disclosure, while reflecting the fact that 
there may be an ongoing dialogue 
between the broker-dealer and the 
customer? If so, what would those 
standards be? 
D. Exceptions to Point of Sale Disclosure 
Requirements 
1. Exception for Subsequent Purchases 
of a Particular Covered Security and 
Class 
Some commenters urged the 
Commission to implement a point of 
sale exception that encompasses an 
investor’s non-periodic purchases of a 
covered security following his or her 
initial purchase.
42
In their view, the 
critical decision related to an 
investment in a covered security is 
made prior to the investor’s first 
purchase of that security, and requiring 
point of sale disclosure for subsequent 
purchases would be duplicative and 
unlikely to promote informed 
investment decisionmaking.
Request for comment. We solicit 
comments on the appropriateness and 
necessity of point of sale disclosure for 
subsequent non-periodic purchases of a 
covered security. Would a subsequent 
purchase exception appropriately 
balance the goal of enhancing 
investment decisionmaking with 
reducing potentially duplicative 
disclosures? Commenters specifically 
are invited to discuss: 
Q. How could a point of sale 
exception for subsequent purchases of a 
covered security be crafted to reduce 
disclosures that otherwise would be 
redundant? Should such an exception 
be absolute, or should it require 
occasional redundant disclosure to 
accommodate investors who might have 
been distracted at the time of the initial 
point of sale disclosure, or might have 
forgotten about it because substantial 
time has passed since receiving the 
disclosure? 
Q. To address the possibility that 
prior point of sale information becomes 
outdated, should the exception be 
limited by how much time separates the 
original transaction and the subsequent 
transaction, such as six months, 12 
months, or some other time period? 
Should such an exception require the 
broker-dealer periodically to provide the 
customer with some or all of the 
information that otherwise would be 
provided at the point of sale? Should 
broker-dealers be permitted to satisfy 
such a requirement by providing 
standardized point of sale forms 
periodically to the customer? Should a 
subsequent purchase exception be 
conditioned on the broker-dealer 
providing transaction-specific point of 
sale disclosures upon the customer’s 
request? Should an investor be able to 
request point of sale disclosure and thus 
override an exception? What other 
conditions or limitations would be 
appropriate for such an exception? 
Q. Should such an exception apply to 
purchases of money market funds? If so, 
how? Should broker-dealers be required 
to make disclosure about money market 
funds at the time the customer funds a 
brokerage account?
43
Q. To what extent could an exception 
for subsequent purchases be subject to 
abuse by unscrupulous salespersons 
who seek to obscure the impact of 
distribution costs by following a 
relatively modest initial sale that bears 
small distribution costs with a much 
larger subsequent sale, without 
disclosure at the latter time?
44
Are there 
ways, such as limiting the subsequent 
sale exception to purchases in amounts 
equal or less than the initial purchase, 
that would help prevent such abuse? 
How would such a limitation affect 
broker-dealer system costs?
Q. How narrowly should an exception 
for subsequent purchases be drafted? 
Would it be enough to limit such an 
exception to purchases of a covered 
security having the issuer, program 
series (or portfolio in the case of 529 
savings plans), and share class (or 
pricing structure in the case of variable 
insurance products) for which the 
customer previously received point of 
sale disclosure from the broker-dealer? 
In the case of 529 savings plans and 
variable insurance products, should 
such an exception be further limited to 
subsequent purchases of the same 
portfolio or directed to the same 
subaccounts? 
Q. Would the use of Internet web sites 
help customers receive point of sale 
information when making subsequent 
purchases? For example, would making 
standardized point of sale information 
available on the Internet be a useful 
means by which broker-dealers would 
be required to provide point of sale 
information upon subsequent 
purchases, to customers who want 
additional information but are willing to 
accept Internet-based disclosure? 
Q. Commenters are invited to estimate 
the total number of transactions that 
would be subject to any such exception, 
as well as the potential cost savings to 
broker-dealers. 
2. Exception for Purchases by 
Institutional Investors 
In proposing rule 15c2–3, we 
requested comment about whether to 
include an exception for purchases by 
institutional investors. Several 
commenters supported such an 
exception, and one recommended that 
we refer to NASD rules to define 
‘‘institutional investor.’’
45
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10532Federal  Register/ Vol.  70,  No.  42 / Friday,  March  4,  2005 / Proposed  Rules  
(whether a natural person, corporation, partnership, 
trust, or otherwise) with total assets of at least $50 
million; (iv) a governmental entity or subdivision 
thereof; (v) an employee benefit plan that meets the 
requirements of Section 403(b) or Section 457 of the 
Internal Revenue Code and has at least 100 
participants (but not including any participant of 
such a plan); (vi) a qualified plan, as defined in 
Section 3(a)(12)(C) of the Act, that has at least 100 
participants (but not including any participant of 
such a plan); (vii) an NASD member or registered 
associated person of such a member; and (viii) a 
person acting solely on behalf of any such 
institutional investor.
46
The $50 million threshold is consistent with 
NASD rules.
47
That $50 million threshold would be consistent 
with the ‘‘qualified investor’’ definition set forth in 
Section 3(a)(54) of the Exchange Act.
48
Such natural persons may be institutional 
investors under NASD rules.
49
The definition of ‘‘qualified investor’’ in 
general encompasses: (i) Investment companies 
registered with the Commission; (ii) issuers eligible 
for an exclusion from the definition of investment 
company pursuant to section 3(c)(7) of the 
Investment Company Act; (iii) banks, savings 
associations, brokers, dealers, insurance companies, 
or business development companies; (iv) certain 
small business investment companies licensed by 
the U.S. Small Business Administration; (v) certain 
benefit plans; (vi) certain trusts; (vii) market 
intermediaries exempt under section 3(c)(2) of the 
Investment Company Act; (viii) associated persons 
of a broker-dealer other than a natural person; (ix) 
foreign banks; (x) foreign governments; (xi) 
corporations, companies, or partnerships that own 
and invest not less than $25 million on a 
discretionary basis; (xii) any natural person who 
owns and invests not less than $25 million on a 
discretionary basis; (xiii) any government or 
political subdivision, agency, or instrumentality of 
a government who owns and invests not less than 
$50 million on a discretionary basis; and (xiv) 
multinational or supranational entities or related 
agencies or instrumentalities. See Section 3(a)(54) 
of the Exchange Act.
50
See supra n. 44.
51
As set forth in the Proposing Release, this 
exception would have been available only to 
broker-dealers that receive no compensation for 
effecting transactions for customers that have no 
accounts with them. Moreover, the exception would 
have been conditioned on the broker-dealer 
providing, within the prior six months, information 
about the maximum potential size of sales loads, 
and asset-based sales charges and service fees, 
associated with covered securities sold by that 
broker, dealer or municipal securities dealer, as 
well as statements about whether the broker, dealer 
or municipal securities dealer receives revenue 
sharing or portfolio brokerage commissions or pays 
differential compensation.
Request for comment. We request 
additional comment regarding the 
advisability, scope and limitations of 
such an exception. In particular, if the 
Commission were to adopt an exception 
for purchases by institutional investors, 
how could we define ‘‘institutional 
investor’’ to limit the exception to 
transactions with persons who may be 
expected to have sufficient financial 
sophistication to make point of sale 
disclosure unnecessary? Commenters 
are specifically invited to discuss: 
Q. Should a definition of 
‘‘institutional investor’’ include banks, 
savings associations, insurance 
companies, or registered investment 
companies? 
Q. Should it include other entities, 
including corporations, partnerships 
and trusts, with total assets of at least 
$50 million?
46
Should a $50 million 
threshold also apply to government or 
political subdivisions, or other 
government agencies or 
instrumentalities?
47
Q. Should natural persons with assets 
of at least $50 million be included 
within the definition of ‘‘institutional 
investor’’?
48
Commenters may also wish 
to discuss the extent to which including 
natural persons would not be necessary 
if a point of sale exemption for 
transactions subject to investment 
adviser discretion, discussed below, 
were adopted.
Q. Should a definition of 
‘‘institutional investor’’ include persons 
acting solely on behalf of any other 
person who meets that definition? 
Should a definition of ‘‘institutional 
investor’’ be extended to other persons? 
Should it instead be based on the 
definition of ‘‘qualified investor’’ set 
forth in Section 3(a)(54) of the Exchange 
Act?
49
Alternatively, should the 
definition be based on the related 
definitions set forth in NASD rules?
50
Q. Should any exception for 
purchases by institutional investors be 
conditioned on the broker-dealer 
providing point of sale disclosure upon 
an institutional investors’ request? 
Would other conditions be appropriate 
for such an exception? 
Q. Commenters are also invited to 
estimate the cost savings to broker-
dealers if a point of sale exception for 
purchases by institutional investors is 
adopted. Commenters are invited to 
include an estimate of the total number 
of transactions that would be subject to 
any such exception, and to discuss 
whether broker-dealer compliance 
systems would be readily able to 
identify transactions with such persons. 
3. Exception for Transactions Subject to 
Investment Adviser Discretion 
Proposed rule 15c2–3 included an 
exception to point of sale disclosure for 
transactions in which the broker-dealer 
exercises investment discretion. 
Commenters generally supported this 
exception. Some commenters 
recommended extending the exception 
to transactions in which an investment 
adviser exercises investment discretion 
for the customer. Absent such an 
exception, the rule would require 
broker-dealers to provide or to send 
information to the investment adviser 
acting on behalf of the customer. 
Request for comment. If the 
Commission were to adopt an exception 
to point of sale disclosure for 
transactions in which an investment 
adviser exercises investment discretion, 
should it be limited to investment 
advisers that are registered either with 
the Commission under Section 203 of 
the Investment Advisers Act of 1940, or 
with a state securities commission or 
agency or office performing like 
functions? Should the broker-dealer be 
required to provide point of sale 
information upon the request of the 
investment adviser? If so, should we 
require that the information be 
delivered in the same time frame as 
other required point of sale disclosures? 
4. Potential Changes to Exception for 
Mailed Orders 
Proposed rule 15c2–3 included a 
limited exception for transactions 
received from a customer via U.S. mail, 
messenger delivery or similar third-
party delivery services.
51
The purpose 
of an exception for mailed-in orders is 
to promote effective disclosure while 
avoiding the need to delay the execution 
of orders received via mail or similar 
services. It was intended to recognize 
that it may not be possible to quickly 
locate those customers and provide the 
required disclosure. One commenter 
criticized the proposed exception as 
overly broad, indicating that it could 
allow broker-dealers to evade disclosure 
by recommending a fund and then 
having customers mail in orders. That 
commenter suggested narrowing the 
exception to apply only when there has 
been ‘‘no prior contact’’ about the 
transaction at which disclosure could 
have occurred.
Request for comment. The 
Commission solicits comments on the 
appropriateness and necessity of the 
mailed order exception. Could the 
potential for abuse be minimized if the 
Commission were to make the exception 
unavailable to a broker-dealer that 
prompts a customer to use the mail, 
messenger delivery or similar third-
party delivery service to submit an 
order? Commenters are specifically 
invited to address: 
Q. Would a ‘‘no prior contact’’ 
standard for mailed-in orders, discussed 
above, be practical? 
Q. Should the exception require a 
broker-dealer relying on it to provide to 
its customers, every six months, 
standardized information about 
distribution costs and compensation 
associated with covered securities sold 
by the broker-dealer? 
Q. What are other possible ways to 
appropriately tailor the exception for 
orders received via the mail, messenger 
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10533Federal  Register/ Vol.  70,  No.  42 / Friday,  March  4,  2005 / Proposed  Rules  
52
For example, the concept of ‘‘share class’’ 
generally is not applicable to variable annuities. In 
addition, variable annuities impose charges for 
available insurance features, which were not 
addressed in the original proposal.
53
Like the other point of sale forms discussed 
above, the proposed new form in Attachment 7 
depicts how the required form would be filled in 
for a hypothetical variable annuity. The form is 
designed to disclose standardized information, plus 
transaction-specific information upon the 
customer’s request or as part of the broker-dealer’s 
standard practice. Similarly, the form would 
include quantified information about upfront sales 
fees and investment amount, deferred sales fees, 
and ongoing fees and expenses, as well as narrative 
information regarding potential conflicts of interest.
54
Broker-dealers would be required to disclose 
upfront sales fees on the proposed new form for 
variable annuities. Although front-end sales fees 
typically have not been charged on variable 
insurance products in recent years, we understand 
that a number of issuers are considering that pricing 
option. See Annuity Market News (October 2004).
55
Mortality and expense risk fees are imposed, in 
part, to compensate the insurance company for 
insurance risks it assumes under the contract.
56
For example, mortality and expense risk 
charges for some variable life insurance products 
are calculated based on underwriting characteristics 
of the contract owner or the insured.
57
A surrender charge may be imposed if an 
investor withdraws money from the annuity before 
a specified time period, often from seven to nine 
years.
58
The term ‘‘fixed account’’ refers to an account 
supported by an insurance company’s general 
account. Variable insurance product investors who 
direct funds to the fixed account are credited a 
predetermined interest rate, which is typically reset 
from time to time.
59
For example, while both products offer 
insurance features, variable life insurance typically 
has a more significant life insurance component, 
while a variable annuity typically may be utilized 
as a retirement investment vehicle. In addition, a 
variable life insurance purchase is typically subject 
to an insurance underwriting process, while a 
variable annuity purchase is not.
delivery or similar third-party delivery 
service? 
E. Special Issues Relating to Point of 
Sale Disclosure for Variable Insurance 
Products 
When we proposed rule 15c2–3, we 
drafted a single set of disclosure 
requirements to apply to variable 
insurance products as well as other 
covered securities. Commenters, 
however, stated that the proposed point 
of sale forms were not well suited to 
illustrating the costs associated with 
variable insurance products and did not 
reflect the products’ particular 
terminology, features, and pricing 
structure.
52
To be effective, required point of sale 
disclosures for purchases of variable 
insurance products should take into 
account the unique characteristics of 
those products. This could be done 
through disclosure forms that are 
tailored to address the costs and 
conflicts particularly associated with 
variable annuities and variable life 
insurance products. Attachment 7 sets 
forth a point of sale disclosure form for 
variable annuities.
53
While this form is 
based on the point of sale forms for 
mutual funds and 529 savings plan 
interests discussed above, it is tailored 
to reflect the unique features of variable 
annuities. For example, it would require 
disclosure of insurance-related costs 
associated with variable annuities, and 
would alert investors to the existence of 
the ‘‘free look’’ right available to them 
under state law.
Request for comment. The 
Commission solicits comment generally 
on the appropriateness and necessity of 
written point of sale disclosure for 
variable annuity and variable life 
insurance products. If the Commission 
were to adopt written point of sale 
disclosure requirements for variable 
annuities and variable life insurance 
products based on the attached form, 
would the form enhance investor 
understanding of those products? Does 
the attached form provide appropriate 
disclosure of the costs and conflicts 
associated with variable annuities?
54
 
Does it provide appropriate disclosure 
for variable life insurance products? 
Commenters are also invited to suggest 
alternative models and submit 
alternative forms for both variable 
annuities and variable life insurance 
products. In addition, commenters 
specifically are invited to discuss the 
following:
Q. How could disclosure of 
comprehensive information about the 
costs of owning variable insurance 
products, such as mortality and expense 
risk fees, insurance costs, and fees 
associated with underlying funds, be 
accomplished?
55
Should each fee 
category be listed separately, or would 
disclosure of aggregate fees associated 
with a particular type of expense, such 
as insurance or fund costs, be 
preferable? Would disclosure of 
aggregate underlying fund fees, rather 
than discrete disclosure of each element 
of the fees’ composition, be sufficient?
Q. Should broker-dealers be required 
in point of sale disclosure to inform 
investors about how variable insurance 
product fees and expenses are charged? 
Should it explain that insurance and 
underlying fund costs may be deducted 
daily from contract value, while other 
charges may be imposed quarterly or 
annually? 
Q. Does the proposed disclosure of 
annual percentage ranges accommodate 
the different ways in which variable 
insurance product fees are calculated? If 
not, how might this be accomplished?
56
Q. Would point of sale disclosure of 
the maximum surrender charge 
percentage, and the general basis for its 
calculation, be sufficient to alert 
investors to these costs, particularly in 
light of the potential complexity of the 
surrender charge calculation?
57
Should 
broker-dealers be required in the point 
of sale disclosure to disclose the 
potential recapture of bonus credits? 
Commenters are invited to provide 
specific suggestions for making this 
disclosure.
Q. Should we require the inclusion in 
point of sale disclosure of costs 
associated with assets directed to the 
insurance company’s fixed account?
58
If 
so, would quantitative disclosure be 
necessary or would narrative disclosure 
suffice?
Q. Commenters also are invited to 
specifically address what terminology 
should be used in the point of sale 
disclosure for variable annuities. Should 
terms used in the point of sale 
disclosure be consistent with language 
commonly used in variable insurance 
product disclosure documents, 
including prospectuses, and sales 
materials? If not, commenters are 
invited to suggest ‘‘plain English’’ 
substitutes. 
Q. Should broker-dealers be required 
in point of sale disclosure to enumerate 
any non-recurring costs of owning 
variable insurance products, such as 
fees associated with excessive 
underlying fund transfers, or loan 
processing fees? 
Q. Because variable annuities 
typically do not impose both upfront 
and deferred sales fees, should the rule 
require broker-dealers to exclude the 
inapplicable section? 
Q. Should we require that the point of 
sale disclosure for variable insurance 
products describe the features and risks 
particular to these products, such as 
their insurance aspects, tax treatment 
and penalties for early withdrawal? 
Q. Although variable annuities and 
variable life insurance share many 
characteristics, the products differ in a 
number of ways.
59
Comment is 
requested on how to tailor point of sale 
disclosure for variable life insurance. 
How should the insurance costs 
associated with variable life insurance 
be disclosed? Many broker-dealers use 
personalized illustrations to provide 
information to prospective variable life 
insurance purchasers. Personalized 
illustrations are tables that demonstrate 
how the cash value, cash surrender 
value, and death benefit under a policy 
change over time based on (i) assumed 
gross rates of return on the underlying 
mutual funds, and (ii) deduction of 
applicable fees and expenses. These 
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10534Federal  Register/ Vol.  70,  No.  42 / Friday,  March  4,  2005 / Proposed  Rules  
60
For example, such criteria could require broker-
dealers to provide confirmations in a format readily 
communicated to investors, using layout and 
presentation that is reasonably calculated to draw 
attention to the information required under the 
confirmation disclosure rule, and using terminology 
that is intended to clearly convey required 
information to the investor.
61
See Siegel & Gale/Gelb Consulting Report.
illustrations are based on the investor’s 
particular circumstances, such as age, 
gender, risk classification, and premium 
payment pattern, and they reflect the 
effect of costs on death benefits and 
cash values. As an alternative to 
requiring point of sale cost disclosure 
for variable life insurance, should we 
instead mandate uniformity among 
personalized illustrations or otherwise 
regulate their content?
Q. Finally, commenters are invited to 
address any issues raised above 
regarding mutual funds and 529 savings 
plan interests that they believe are 
relevant to variable insurance product 
disclosure. 
III. Confirmation Proposal 
Commenters raised a number of issues 
about the proposed rule 15c2–2 
confirmation requirements. Some were 
similar to issues discussed above with 
regard to point of sale disclosure, while 
others were specific to confirmation 
disclosure. In light of those issues and 
further analysis of the proposal, we seek 
additional comment on the confirmation 
disclosure in a number of particular 
areas. 
A. Format of Confirmation Disclosure 
Proposed rule 15c2–2 would require 
broker-dealers to deliver confirmation 
disclosures to customers ‘‘in a manner 
consistent with Schedule 15C,’’ subject 
to an exception for a periodic reporting 
alternative. The proposed Schedule 15C 
confirmation disclosure form includes 
general transaction information (e.g., 
price and net asset value) plus 
purchase-specific information about 
distribution costs, broker-dealer 
compensation, differential 
compensation and breakpoint discounts, 
as well as extensive definitions and 
explanations. 
Several commenters stated that the 
proposed disclosure form was 
inadequate in that it would omit 
important information, would not 
permit adequate operational flexibility, 
and would not permit disclosure of 
additional information that may be 
needed to prevent the confirmation from 
being misleading. Commenters also 
highlighted the industry-wide cost of 
upgrading confirmation generation and 
delivery systems to produce two-page 
confirmations consistent with Schedule 
15C. Conversely, one commenter 
suggested that the proposal would not 
adequately ensure standardized and 
transparent disclosure. Our own 
investor outreach and AARP’s testing 
indicated that Schedule 15C was less 
effective than intended. 
Request for comment. If the 
Commission were to adopt revisions to 
the confirmation requirements in 
connection with transactions in covered 
securities, should it allow broker-
dealers to use their own format for 
presentation of information in the 
confirmation (in contrast to our 
proposal to mandate the format of point 
of sale disclosures) in order to avoid 
costs for upgrading existing 
confirmation generation and delivery 
systems? Would this approach still 
appropriately convey the necessary 
information to investors? Alternatively, 
should the Commission prescribe a 
format for confirmation disclosures, 
such as the format used to produce the 
proposed new confirmations set forth in 
Attachments 8–13? Attachments 8–10 
show possible confirmations for mutual 
fund purchases and Attachments 11–13 
show possible confirmations for 529 
savings plans. Commenters particularly 
are invited to discuss the following:
Q. Would it be appropriate to permit 
broker-dealers to deliver confirmations 
in varying formats so long as required 
information is disclosed? If no specific 
format is required, should the 
Commission require broker-dealers to 
follow specific disclosure criteria?
60
Q. If a specific confirmation 
disclosure form is not prescribed, 
should broker-dealers be precluded 
from using different terminology (e.g., 
terms such as ‘‘sales load’’ or ‘‘12b–1 
fee’’) on confirmations than on point of 
sale disclosure forms? 
Q. Will investors be more likely to be 
confused or unable to elicit relevant 
information if the format is not specified 
by the Commission? Commenters are 
also invited to estimate the cost savings 
that might be realized if broker-dealers 
were not required to deliver 
confirmations in a particular format. 
B. Confirmation Disclosure of 
Comprehensive Ownership Cost 
Information 
Proposed rule 15c2–2 would require 
confirmation disclosure of the potential 
amount of any asset-based sales charges 
and service fees that would be incurred 
by the issuer of the covered security in 
connection with the shares or units 
purchased. That was consistent with the 
rule’s proposed focus on distribution 
costs rather than total ownership costs. 
As with point of sale disclosure, many 
investors favored confirmation 
disclosure of comprehensive 
information about ownership costs, 
beyond distribution costs, including 
disclosure of non-distribution costs 
such as fund management fees and other 
expenses.
61
Request for comment. Should the 
Commission require confirmations to 
include information about all ongoing 
costs of owning covered securities, such 
as ‘‘management fees’’ and ‘‘other 
expenses’’, and not merely distribution 
costs? Commenters also may wish to 
address the forms in Attachments 8–13, 
which illustrate how such fees could be 
set forth on confirmations. Commenters 
particularly are invited to discuss: 
Q. Would comprehensive 
confirmation disclosure of all the asset-
based distribution charges, management 
fees and other expenses that constitute 
the annual asset-based costs of owning 
covered securities be particularly 
appropriate in light of the possibility 
that point of sale disclosures could be 
given orally, or that no point of sale 
disclosure could be given at all if a 
subsequent purchase exception is 
adopted? Would disclosure in a 
specified format and/or using specific 
terminology be particularly appropriate 
for the same reasons? 
Q. Should information about 
comprehensive asset-based fees and 
costs be disclosed separately by category 
and in the aggregate, or only in the 
aggregate? Should the fees be expressed 
as a percentage of asset value and in 
dollars? 
Q. In the case of two-tiered products, 
such as 529 savings plan interests and 
variable insurance products, should the 
disclosure requirement encompass fees 
associated with underlying securities as 
well as fees incurred by the issuers of 
covered securities? If disclosing the 
ownership fees associated with each 
fund underlying an insurance separate 
account or other covered security would 
not be useful, should confirmations 
instead set forth information about the 
fees associated with the underlying 
funds that are involved in a particular 
transaction, or about the range of 
possible fees? In such circumstances, 
should percentage disclosure be based 
on either the net asset value of the 
underlying securities purchased using 
money invested in the covered security 
or on the asset value of the covered 
security, itself? 
Q. What operational issues would be 
related to the inclusion of 
comprehensive disclosure of the asset-
based charges on transaction 
confirmations? Commenters are invited 
to estimate the cost of including this 
information. 
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10535Federal  Register/ Vol.  70,  No.  42 / Friday,  March  4,  2005 / Proposed  Rules  
C. Confirmation Disclosure of Broker-
Dealer Compensation 
As described in the Proposing 
Release, proposed rule 15c2–2 would 
have required confirmation disclosure 
of the amount of dealer concessions 
earned by the broker-dealer in 
connection with the transaction, as well 
as estimates about the amounts of 
revenue sharing and portfolio brokerage 
commissions that a broker-dealer or its 
affiliates receives from persons within 
the fund complex. It also would require 
‘‘yes’’ or ‘‘no’’ disclosure about whether 
the broker-dealer engaged in certain 
differential compensation practices. 
While many investors supported the 
concept of confirmation disclosure 
about broker-dealer compensation, the 
results of our in-depth investor 
interviews and focus group testing 
suggested that investors are more 
interested in seeing the total amounts 
they pay for investments in covered 
securities than in seeing the broker-
dealer’s precise compensation. Some 
securities industry commenters 
discussed the difficulty of placing 
quantitative information about 
compensation on confirmations, and 
emphasized the cost required to convey 
compensation information from selling 
brokers to firms that issue confirmations 
or to other entities that prepare 
confirmations on behalf of selling broker 
(as well as the fact that investors 
ultimately may be expected to bear the 
bulk of those costs). A number of 
commenters stated that confirmation 
disclosure of broker-dealer 
compensation and conflicts of interest 
would be duplicative of the point of sale 
disclosure, and that disclosure of 
compensation and conflicts could be 
done more effectively through broker-
dealer Internet web sites. Some 
securities industry commenters also 
stated that the proposed method of 
quantifying revenue sharing payments 
would be misleading, and that the 
disclosure of differential compensation 
was unclear and not well tailored to 
those payments. 
As discussed in more detail below, we 
are asking for comments about the 
possible use of Internet-based disclosure 
as a supplement to, but not a 
replacement for, point of sale and 
confirmation disclosure. Under such an 
alternative, broker-dealers would be 
permitted to show the quantified details 
of their compensation practices to 
interested investors via a web site, while 
continuing to disclose the existence of 
the conflict of interest arising from such 
practices on point of sale and 
confirmation disclosure documents. 
Request for comment. The 
Commission solicits comment on all 
aspects of the proposed disclosure of 
broker-dealer compensation. Should the 
Commission require broker-dealers to 
show quantified details of their 
compensation practices via a web site, 
and disclose only the existence of the 
conflict of interest arising from such 
practices on point of sale and 
confirmation disclosure documents? 
Commenters specifically are invited to 
discuss the following: 
Q. Would supplementary Internet-
based disclosure of the type discussed 
below serve as an appropriate and 
useful alternative to the confirmation 
disclosure proposed in the Proposing 
Release about how much and how 
broker-dealers and their personnel are 
compensated, particularly in light of 
concerns about ‘‘information overload’’? 
Q. If confirmation disclosure about 
compensation is appropriate to assist 
investors, should information about 
revenue sharing payments be quantified 
on confirmations? If so, how could that 
accurately be done? Should we require, 
in addition to amount, the sources of 
revenue sharing payments received by 
the broker-dealer on the confirmation 
(e.g., ‘‘Last year, fund manager AAA or 
its affiliates paid us $XX to promote the 
sale of their funds’’).
Q. What are the potential cost savings 
associated with requiring disclosure of 
the existence of the conflict of interest 
arising from broker compensation 
practices on the confirmation and point 
of sale documents and more detailed, 
quantified information about those 
practices on the Internet? 
Q. If a transaction confirmation is 
issued by a clearing broker-dealer, but 
the sale also was effected by an 
introducing broker-dealer, should 
confirmation disclosure identify 
conflicts of interest separately for each 
broker-dealer? 
D. Confirmations for Transactions 
Involving 529 Savings Plan Interests 
As described in the Proposing 
Release, proposed rule 15c2–2 would 
require confirmation disclosure of the 
net asset value of the covered security, 
and, if different, the public offering 
price. One commenter noted that in the 
context of 529 savings plan interests 
there may not be an issuer-calculated 
net asset value available, and suggested 
that broker-dealers, issuers and other 
industry participants will need to work 
toward making net asset value, or 
information necessary to calculate net 
asset value, available on a daily basis. 
Because 529 savings plan interests are 
two-tiered products, and their 
underlying portfolios may be purchased 
at a different time than the investment 
in some plans, the proposed rule may 
require multiple confirmations. 
Request for comment. Commenters 
are invited to discuss generally 
confirmation disclosure in connection 
with transactions in 529 savings plan 
interests, as well as the following issues: 
Q. In the event that a 529 savings plan 
issuer does not make information about 
net asset value and price available daily, 
how should a broker-dealer effecting a 
transaction in an interest in that plan 
report the net asset value and public 
offering price on the confirmation? 
Should the initial confirmation report 
that amount as ‘‘unknown’’? Should the 
broker-dealer be required to 
subsequently send the customer 
complete information as soon as it 
becomes available, through a 
supplementary confirmation? Are there 
other mechanisms that the Commission 
should permit broker-dealers to use to 
provide the required disclosure? 
Q. To what extent do existing 529 
savings plans hold investor money for 
one or more days before placing that 
investment into an underlying security? 
In such circumstances, should broker-
dealers be required to provide separate 
confirmations (the first at the time of the 
customer’s investment, and the second 
when the state issuer places that money 
into the underlying security)? In these 
circumstances, would the broker-dealer 
be sufficiently apprised of the state’s 
practices to enable it to comply? For 
each such confirmation, what price or 
net asset value should be conveyed? 
Commenters are invited to suggest 
alternatives to this approach that would 
be consistent with investor protection. 
E. Confirmations for Transactions 
Involving Variable Insurance Products 
Attachment 14 sets forth a 
confirmation related to a transaction in 
a variable annuity. This confirmation 
form seeks to reflect the special 
characteristics and terminology 
associated with those products. For 
example, the form uses the term ‘‘unit 
value’’ rather than ‘‘net asset value,’’ 
and sets forth the unit value and 
number of units for each subaccount 
involved in a transaction. When 
appropriate, as shown on Attachment 
14, the confirmation would set forth 
dollar amounts for each subaccount 
when accumulation units are not used. 
Request for comment. The 
Commission solicits comment on all 
aspects of variable insurance product 
confirmation disclosure. If the 
Commission were to adopt confirmation 
disclosure requirements for variable 
insurance products similar to those on 
this form, would investors be 
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10536Federal  Register/ Vol.  70,  No.  42 / Friday,  March  4,  2005 / Proposed  Rules  
62
For example, the Commission explains terms in 
its publication ‘‘Variable Annuities: What You 
Should Know’’ (available at http://www.sec.gov/
investor/pubs/varannty.htm). Would these terms be 
appropriate to use in the context of variable life 
products?
63
However, in part II.B above we requested 
comment about whether it would be appropriate to 
permit broker-dealers to deliver point of sale 
disclosures over the Internet or by e-mail to those 
customers who have opted to receive such 
disclosures electronically.
64
See Siegel & Gale/Gelb Consulting Report.
65
As set forth in the Proposing Release, rule 
15c2–2 would have required broker-dealers to 
quantify revenue sharing and portfolio brokerage 
commissions on confirmations using a pro rata 
estimate approach that considered: (i) the amount 
of the customer’s transaction, (ii) the broker-dealer’s 
prior receipt of compensation from the fund 
complex, and (iii) the broker-dealer’s prior 
distribution of shares on behalf of the fund 
complex. Some securities industry commenters 
objected to the proposed quantification of revenue 
sharing associated with particular transactions. 
Securities industry commenters also emphasized 
that providing transaction-specific quantified 
information about compensation could be 
particularly costly on confirmations, as that could 
require selling broker-dealers to develop linkages to 
convey relevant data to clearing firms or others that 
issue confirmations.
66
For example, an investor should be able to see 
not only what is the maximum possible fee a 
broker-dealer may receive, but also what a broker-
dealer actually has received or can expect to receive 
for selling a particular covered security. That is 
because a customer would be better able to 
scrutinize a broker-dealer’s sales efforts if, for 
example, the customer can see that one potential 
investment is associated with a 0.25 percent 
transaction-based fee, but another is associated with 
a 0.15 percent transaction-based fee.
67
As noted in the Proposing Release, in 2003 
NASD requested comment on proposed rules to 
require member firms to disclose certain 
information about revenue sharing and differential 
compensation to customers at account opening or, 
if no account is established, at the time the 
customer first purchases shares of an investment 
adequately informed about transactions 
in those products? Is the confirmation in 
Attachment 14 appropriate for 
transactions in variable life insurance 
products? Commenters specifically are 
invited to discuss: 
Q. Would the confirmation form 
appropriately inform customers about 
the particulars of the investment, 
including information about the value 
and price of the investment (including 
amounts allocated to particular 
subaccounts and the insurance company 
fixed account) and the costs associated 
with owning underlying securities? 
Q. What would be the implementation 
and cost issues associated with applying 
such confirmation requirements to 
variable insurance products? 
Q. How should we tailor the 
confirmation disclosure requirement to 
variable life insurance products? How 
should the insurance costs associated 
with variable life insurance be 
disclosed? Should the forms include 
any explanation or definitions of the 
insurance terms that are used, such as 
‘‘mortality and expense risk fees,’’ ‘‘cost 
of insurance,’’ ‘‘death benefit,’’ and 
‘‘fixed account’’? Are there other 
insurance terms which should be used 
on the disclosures? Are there terms for 
which explanatory definitions would be 
useful to investors?
62
If so, what 
definitions should be used? 
Alternatively, would including 
definitions of insurance terms on the 
forms lead to ‘‘information overload’’ or 
otherwise not be useful to investors?
IV. Supplemental Internet-based 
Disclosure of Detailed Information 
About Revenue Sharing Payments and 
Other Broker Compensation Practices 
Some commenters recommended 
permitting the proposed point-of-sale 
disclosures to be made on a broker-
dealers’ web site. We do not believe that 
Internet-based disclosure would be an 
adequate substitute for point of sale 
disclosure and improved confirmation 
disclosure.
63
We also do not believe that 
requiring investors to use the Internet as 
the sole means to obtain key 
information about their own costs of 
owning covered securities and about 
special compensation arrangements that 
lead to conflicts of interest will 
adequately serve investors’ interests, or 
adequately address broker-dealers’ 
obligations.
At the same time, a number of factors 
suggest that Internet-based disclosure 
could supplement point of sale and 
confirmation disclosures, and could 
adequately serve as a primary means of 
providing some types of information to 
customers. As noted above, investors 
generally expressed more interest in 
information about the costs of owning 
covered securities than about broker-
dealer compensation.
64
Moreover, point 
of sale and confirmation disclosure of 
quantified compensation information 
also may lead to ‘‘information 
overload.’’ This may distract investor 
attention from information about 
distribution costs. Also, it would be 
difficult to accurately depict some 
compensation arrangements on simple 
disclosure documents given that any 
such approach may inaccurately cause 
investors to think their particular 
purchase would lead their broker-dealer 
to receive precisely the disclosed 
amount of revenue sharing, when in 
reality there would be no such causal 
link.
65
Internet-based disclosure that 
provides customers with quantified 
information about broker-dealer 
compensation arrangements (not merely 
generic descriptive information) and 
identifies the sources of payments made 
under those arrangements could help 
customers evaluate how those 
arrangements can impact broker-dealers’ 
recommendations and presentation of 
investment options. Necessarily, 
Internet-based disclosure must be 
supplemented with other means for 
investors to obtain the disclosure if they 
have no access to the Internet or desire 
to receive the disclosure by other 
means. Accordingly, we are considering 
requiring broker-dealers to maintain a 
toll-free telephone number which 
investors could call to request that a 
copy of the Internet-based disclosure be 
mailed to them. 
Some broker-dealers currently 
disclose on their web sites quantified 
information about potential amounts of 
revenue sharing or other payments from 
fund families, including information 
about payments the broker-dealers 
receives from mutual funds for 
recordkeeping activities. While those 
web sites that have quantitative 
information represent steps in the right 
direction, customers should be able to 
see more information about how their 
sales personnel are compensated.
66
 
Moreover, customers should have ready 
access to quantified information rather 
than having to search for the 
information in the midst of extensive 
explanations. Customers also should be 
able to see compensation information 
that is labeled clearly and consistently, 
and not referred to by vague or generic 
terms such as ‘‘administrative service’’ 
or ‘‘support fees’’ or ‘‘expense 
reimbursement.’’
If the Commission were to require 
Internet-based disclosure of 
compensation arrangements—as a 
supplement to proposed disclosure of 
the existence of the conflict of interest 
arising from such practices on point of 
sale and confirmation disclosure 
documents—such Internet-based 
disclosure could include information 
about: 
•Revenue sharing payments; 
•Certain other payments out of issuer 
assets that may provide incentives for 
broker-dealers to distribute covered 
securities; 
•Special compensation-related 
conditions that broker-dealers place on 
fund distribution; 
•Broker compensation; and 
•Brokers’ differential compensation 
practices. 
Attachment 15 illustrates how such 
Internet-based disclosure could appear 
in practice, if we were to adopt a rule 
requiring Internet-based disclosure of 
broker-dealer compensation 
arrangements.
67
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10537Federal  Register/ Vol.  70,  No.  42 / Friday,  March  4,  2005 / Proposed  Rules  
company. The proposal also would require broker-
dealers to use the Internet or a toll-free telephone 
number to provide updated information, or else to 
send updated information to customers semi-
annually. Among other features, that NASD 
proposal would require broker-dealers to rank fund 
families that make revenue sharing payments in 
descending order of amounts paid to the broker-
dealer (without having to identify the actual 
amount of compensation received). It also would 
require broker-dealers to state whether they pay 
differential compensation in the form of heightened 
payout ratios, and to identify the investment 
companies favored by those arrangements. See 
NASD Notice to Members 03–54 (Sept. 2003). 
The approach to Internet-based disclosure we are 
considering here would focus on quantifying 
compensation resulting from a customer’s purchase 
of a specific covered security. Thus, the approach 
described here would appear to complement the 
approach described by NASD (which has yet to be 
submitted as a proposed rule change).
68
Those payments provide sales incentives that 
create conflicts between broker-dealers’ financial 
interests and their agency duties to customers. 
Revenue sharing payments may lead a broker-dealer 
to use ‘‘preferred lists’’ that explicitly favor the 
distribution of certain funds. Revenue sharing 
payments also may lead to favoritism that is less 
explicit but just as real, such as through broker-
dealer practices allowing funds that make revenue 
sharing payments to have special access to broker-
dealer sales personnel, and through other incentives 
or instructions that a broker-dealer may provide to 
managers or salespersons. See, e.g., In the matter of 
Edward D. Jones & Co., Securities Act Release No. 
8520 (Dec. 22, 2004) (broker-dealer violated 
antifraud provisions of Securities Act and Exchange 
Act by failing to disclose conflicts of interest arising 
from receipt of revenue sharing, directed brokerage 
payments and other payments from ‘‘preferred’’ 
families that were exclusively promoted by broker-
dealer); In the Matter of Morgan Stanley DW Inc., 
Securities Act Release No. 8339 (Nov. 17, 2003) 
(broker-dealer violated antifraud provisions of 
Securities Act by failing to disclose special 
promotion of funds from families that paid revenue 
sharing and portfolio brokerage). 
Revenue sharing payments also can play a role in 
compensating broker-dealers that distribute no-load 
funds through mutual fund ‘‘supermarkets.’’ Those 
broker-dealers may charge commissions for some 
fund purchases, but provide commission-free 
purchases of funds from fund complexes that make 
revenue sharing payments. Funds that make 
revenue sharing payments also may be placed on 
lists of mutual funds that a broker-dealer suggests 
or otherwise highlights to customers.
69
In asking above about revenue sharing 
disclosure requirements at the point of sale, we 
discuss potential definitions and exclusions that 
may appropriately focus the disclosure requirement 
in that way.
70
Payments linked to a broker-dealer’s recent 
sales of shares issued by a fund complex give the 
broker-dealer an incentive to sell more shares of 
that fund complex. Payments linked to the asset-
based fees that the adviser earns in connection with 
shares of a fund complex held by broker-dealer 
customers give the broker-dealer an incentive to sell 
more shares of, and keep its customers invested in, 
that fund complex. Miscellaneous payments such as 
sponsorships of broker-dealer training programs 
further promote the sale of shares on behalf of the 
fund complex.
71
Retrospective information would have the 
benefit of being comprehensive, while prospective 
information would have the benefit of being more 
timely. Such prospective information alone may be 
incomplete given that broker-dealers and fund 
families may adjust revenue sharing payments to 
reflect prior sales efforts, and due to the informal 
nature of some of these arrangements. There may 
be special disclosure challenges because certain 
promotional payment arrangements are not reduced 
to written agreements. Under such an approach, 
broker-dealers would have to fairly and accurately 
depict their understandings, together with any 
ambiguities in compensation that may exist. 
Investors would then have to weigh the significance 
of those ambiguities.
Finally, for those customers who have 
no access to the Internet or who prefer 
other means of receiving the proposed 
Internet-based disclosures, we would 
also require broker-dealers to maintain 
toll-free telephone numbers by which 
investors can request a mailed copy of 
the disclosure information. As 
discussed in previous sections, the toll-
free number would be disclosed on 
point of sale disclosures and on 
transaction confirmations. 
A. Detailed Disclosure of Revenue 
Sharing Payments 
A critically important component of 
any Internet-based disclosure of broker-
dealer compensation arrangements 
would be detailed disclosures of 
revenue sharing payments that selling 
broker-dealers or their affiliates may 
receive for distributing fund shares from 
a fund’s investment adviser or others.
68
 
As with qualitative point of sale 
disclosure, we are proposing to require 
quantitative Internet-based disclosure of 
revenue sharing payments, regardless of 
how they are labeled. Even if a 
particular payment from a fund complex 
fairly can be depicted as offsetting 
broker-dealer expenses connected with 
fund distribution, the payments still can 
constitute direct financial incentives for 
a broker-dealer to favor that fund 
complex over fund complexes that do 
not make such payments. The proposed 
disclosure requirement would be 
targeted toward payments that are most 
likely to impact the broker-dealer’s 
distribution of the covered security, by 
excluding payments from certain 
sources and certain payments to 
affiliates.
69
On the Internet, the 
compensation that is required to be 
disclosed could be broken down by 
payment stream (with separate 
disclosure of transaction-based 
payments), asset-based payments, and 
miscellaneous payments.
70
The source 
of payments would also be disclosed.
Attachment 15 illustrates how those 
separate types of payment streams could 
be disclosed under such a requirement. 
For example, disclosure of transaction-
based revenue sharing payments that 
the broker-dealer or associated person 
receives from certain affiliates of a fund 
would be required to be expressed in 
dollars received per $1,000 of covered 
securities sold, reflecting benchmarks 
that may lead to stepped-up 
compensation when the broker-dealer 
sells more shares of a particular mutual 
fund or fund family. Similarly, 
disclosure of asset-based revenue 
sharing payments would be required to 
be expressed in dollars received per 
$1,000 dollars sold, again reflecting 
benchmarks that may impact the 
compensation. Such disclosures would 
encompass revenue sharing payments 
received, whether by a broker-dealer or 
by an affiliate, in connection with 
securities that underlie a covered 
security, including revenue sharing 
payments received from underlying 
funds in connection with sales of 529 
savings plans and variable insurance 
products. 
This type of approach to disclosure 
also would require broker-dealers to 
summarize other revenue sharing 
payments that do not reflect transaction-
based, and asset-based, income streams. 
Such amounts would be depicted 
retrospectively in terms of total dollars 
received in the prior fiscal year, along 
with a statement of the value of the 
covered securities that the broker-dealer 
or associated person sold on behalf of 
that group of issuers (or ‘‘related 
issuers’’) during that period. Such 
amounts also would be depicted 
prospectively as a reasonable estimate of 
such revenue sharing payments 
expected to be received in the current 
fiscal year based on present 
arrangements or understandings, along 
with a statement of the amount of 
revenue sharing payments received in 
the prior fiscal quarter.
71
Request for comment. Commenters 
are invited to discuss the possible 
contours of an Internet-based disclosure 
requirement for revenue sharing 
payments as an alternative to disclosure 
in point of sale or confirmation 
documents, including the adequacy of 
the disclosure set forth in Attachment 
15. Commenters particularly are invited 
to discuss the following: 
Q. Would such disclosure adequately 
set forth information about the various 
possible payment streams? Would more 
particularized disclosure better alert 
customers to the resulting conflicts of 
interest? If so, how should we tailor the 
required disclosure to do so? Should we 
require broker-dealers to state the total 
amounts of revenue sharing payments 
received by source? Should the 
Commission instead require disclosure 
of the source and amounts of payments 
at the point of sale or on transaction 
confirmations? 
Q. How should customers be 
informed about revenue sharing 
payments and other payments that are 
not subject to formal agreements, but 
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10538Federal  Register/ Vol.  70,  No.  42 / Friday,  March  4,  2005 / Proposed  Rules  
72
Other payments out of issuer assets would not 
appear to pose a significant influence on broker-
dealer distribution. For example, payments from 
issuers to compensate broker-dealers for mailing 
certain documents (other than the prospectus) to 
customers are subject to cost limits imposed by 
NASD rules, and as such may not be expected to 
provide compensation for distribution services. See 
NASD rule IM–2260 (approved rates of 
reimbursement). 
Also, as noted above, payments from funds for 
brokerage services are barred from being used to 
finance distribution. In September 2004, we 
amended rule 12b–1 under the Investment 
Company Act to prohibit the use of fund brokerage 
to compensate broker-dealers for selling fund 
shares. See Investment Company Act Release No. 
26591 (Sept. 2, 2004), 69 FR 54728 (Sept. 9, 2004).
instead take the form of ad hoc payment 
arrangements? 
Q. How should customers be 
informed about prospective revenue 
sharing payments that a broker-dealer 
expects to receive in the future but that 
have not been paid or accrued? 
Q. How should investors be informed 
of payments received by the insurance 
company issuing a variable product 
from the investment advisers of 
underlying funds? What types of 
conflicts do these payments raise? 
B. Disclosure of Certain Payments Out 
of Issuer Assets 
Internet-based disclosure also might 
be appropriate for certain payments that 
broker-dealers receive out of fund 
assets. These payments may not pose 
the same conflicts of interest as certain 
payments received from investment 
advisers and other non-issuers but they 
may provide incentives for broker-
dealers to distribute covered securities. 
For example, payments out of issuer 
assets may represent compensation for 
the broker-dealer’s own recordkeeping 
activities. Even when payments out of 
fund assets could be justified as bona 
fide compensation for non-distribution 
services, they may constitute a direct 
financial incentive for a broker-dealer to 
favor fund complexes that make such 
payments.
72
Attachment 15 illustrates how such 
payments might be depicted in a way 
that would allow customers to evaluate 
the significance of the incentives they 
provide. As shown in this illustration, 
the broker-dealer would be required to 
disclose a summary of all payments it 
receives from the issuer of the covered 
security (or from the issuer of an 
underlying covered security in the case 
of two-tiered products). Such amounts 
would be disclosed retrospectively (as a 
statement of the total dollars of such 
payments that the broker-dealer 
received from such issuer in the prior 
fiscal year) and prospectively (as a 
reasonable estimate of such payments 
that the broker-dealer can expect to 
receive from such issuer in the current 
fiscal year, based on present 
arrangements or understandings). 
Request for comment. Would 
requiring a broker-dealer to disclose 
certain payments received from issuers 
discussed above be useful to investors? 
Commenters particularly are invited to 
discuss the following: 
Q. Would disclosure of amounts 
received from issuers, with specific 
exclusions for brokerage commissions, 
mailing fees and other payments 
disclosed elsewhere, appropriately 
provide customers with information 
about issuer payments that can pose 
conflicts of interest? Should such a 
disclosure requirement be more specific, 
perhaps by focusing on payments for 
transfer agent-related activities or other 
recordkeeping-related activities? 
Q. Should such a disclosure 
requirement encompass payments 
received by certain affiliates of broker-
dealers? To what extent do broker-
dealer affiliates receive such payments 
in connection with securities 
distributed by broker-dealers? How 
could required disclosure of those issuer 
payments be implemented for payments 
received by associated persons of a 
broker-dealer? 
Q. Are there other payments or 
economic benefits that broker-dealers 
receive from issuers or their affiliates 
that we should require broker-dealers to 
disclose? 
Q. Broker-dealers particularly are 
invited to discuss how the amounts they 
receive via such payments compare to 
the costs they would incur to provide 
such services (particularly costs they 
would not otherwise incur as part of 
their normal course of business). 
C. Disclosure of Other Distribution-
Related Factors That Influence Broker-
Dealer Sales of Covered Securities 
Internet-based disclosure also may be 
appropriate for informing customers 
about factors in addition to those 
disclosed at point of sale that influence 
broker-dealer sales of covered securities. 
For example, as noted above, some 
broker-dealers give fund complexes that 
make revenue sharing payments special 
marketing access to broker-dealer sales 
personnel that is not available to other 
fund complexes. Some broker-dealers 
may have a practice of restricting 
recommendations of securities to the 
funds of complexes that make revenue 
sharing payments, or of restricting 
placement of securities on a highlighted 
list to only those funds of complexes 
that make revenue sharing payments. 
We understand that some broker-dealers 
may require that a fund complex pay 
asset-based distribution fees under a 
rule 12b–1 plan with regard to other 
mutual funds of that complex, including 
mutual funds that are closed to new 
investors, as a condition of selling one 
or more other funds of that fund 
complex. 
Additional information about these 
practices may help customers evaluate 
broker-dealer sales incentives. 
Attachment 15 illustrates the types of 
disclosure that could result if broker-
dealers were required to use the Internet 
to set forth any explicit or implicit 
arrangement by which they condition 
any distribution-related benefit to a 
fund or fund complex upon the receipt 
of certain compensation or other 
economic benefits. In fulfilling their 
disclosure obligations under such a 
provision, a broker-dealer would need 
to comprehensively inform customers 
about all arrangements by which 
distribution is conditioned on special 
compensation or benefits. Under this 
form, required disclosures would 
include, if applicable, statements: (i) 
That the broker-dealer does not sell no-
load funds; (ii) that the broker-dealer 
provides preferred salesperson access to 
fund complexes or other issuers that 
make revenue sharing payments; (iii) 
that the broker-dealer only distributes 
covered securities whose issuer pays a 
certain threshold of recordkeeping-
related fees; (iv) that all covered 
securities on the broker-dealer’s 
‘‘preferred’’ or ‘‘select’’ list of securities 
make revenue sharing payments to the 
broker-dealer; or (v) that the broker-
dealer conditions distribution of any 
covered security of the fund complex or 
other issuer to the receipt of rule 12b-
1 fees in connection with other covered 
securities of that fund complex or other 
issuer. 
Request for comment. Should the 
Commission adopt a requirement for 
broker-dealers to disclose additional 
distribution-related conditions? If 
adopted, should this disclosure be on 
the Internet? Would such disclosures 
assist customers in understanding 
broker-dealer financial incentives? 
Q. To what extent do broker-dealers 
currently have a practice of 
conditioning recommendations and 
placement on preferred lists to fund 
families that make revenue sharing 
payments? To what extent do broker-
dealers currently condition distribution 
of funds on receipt of rule 12b-1 fees 
from all funds in the complex? 
Q. Should any rules explicitly 
identify certain arrangements that 
would have to be disclosed under this 
type of provision, such as those in 
statements (i) through (v) above? If so, 
which arrangements should be 
identified with particularity in a rule? 
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10539Federal  Register/ Vol.  70,  No.  42 / Friday,  March  4,  2005 / Proposed  Rules  
73
The amounts earned by an underwriter may be 
difficult to quantify in a fee schedule because an 
underwriter may retain the residual between sales 
fees paid by investors and dealer concessions paid 
to selling brokers, rather than a preset amount. That 
particularly would be an issue in the case of share 
classes with a deferred sales load.
74
Disclosure of the source of clearing firm 
compensation would appear appropriate because 
some clearing broker-dealers enter into promotional 
arrangements through which clearing fees are paid 
by a fund complex rather than by selling broker-
dealers.
75
That type of compensation incentive was not 
proposed to be captured at the point of sale due to 
the need to keep point of sale disclosure simple and 
the risk that such disclosure either would 
invariably lead to a ‘‘yes’’ answer or else would be 
too unwieldy at the point of sale.
76
A broker-dealer might determine that a 
particular set of funds are ‘‘comparable’’ if they fall 
within the same grouping or categorizations 
provided by major vendors of mutual fund data. 
Such groupings may focus on particular investment 
styles as ‘‘mid cap value’’ or industry sector funds, 
as well as distinguishing between index funds and 
actively managed funds. Such a type of highly 
focused categorization appears appropriate for 
disclosure of differential compensation, because 
that focus would appear consistent with differences 
in broker-dealer compensation. Such a type of 
‘‘comparable’’ categorization standard is intended 
to avoid comparisons that would invariably lead to 
‘‘yes’’ answers, such as comparisons of load funds 
with no-load funds. Broker-dealers would have to 
determine whether or not the compensation 
associated with a particular mutual fund is above 
the average compensation associated with the 
applicable category.
Should such conditions also have to be 
disclosed at the point of sale? 
D. Disclosure of Compensation That 
Broker-Dealers Receive in Connection 
With Distributing Covered Securities 
An Internet-based disclosure 
requirement could encompass 
disclosure of the concessions that 
broker-dealers earn in connection with 
a transaction, and annual asset-based 
payments that broker-dealers would 
expect to receive for selling the covered 
security or for providing services to the 
customer’s account (including payments 
denoted as compensation for providing 
shareholder services, as well as other 
distribution-related compensation). 
Such disclosures would include 
payments in connection with 
underlying securities purchased via 
two-tiered products, such as 529 savings 
plans and variable insurance products. 
As depicted in Attachment 15, such 
payments would be quantified based on 
model purchases to allow investors to 
see how much of a dealer concession 
the broker-dealer would receive in 
connection with various transaction 
sizes or asset amounts. 
Request for comment. Should the 
Commission adopt an Internet-based 
disclosure requirement of broker-dealer 
compensation arrangements, including 
dealer concessions and annual asset-
based payments that broker-dealers 
would expect to receive for selling the 
covered security or for providing 
services to the customer’s account? 
Commenters specifically are invited to 
discuss whether the Commission should 
require such Internet-based disclosure 
as a supplement to point of sale and 
confirmation disclosure. In addition, 
commenters are requested to discuss the 
following: 
Q. Would disclosure about dealer 
concessions and annual asset-based fees 
earned by each broker-dealer effecting a 
transaction appropriately encompass all 
standard types of compensation? 
Q. How should disclosure of such 
amounts be quantified? Would requiring 
thresholds of $1,000, $50,000 and 
$100,000 be appropriate? Should 
disclosure of compensation related to 
front-end sales fees reflect a model 
purchase of $1,000 and any breakpoint 
threshold?
Q. How should such disclosure 
requirements be applied to broker-
dealer underwriters for mutual funds 
and other covered securities?
73
Would 
investors benefit from disclosure of 
underwriter compensation in the same 
way they would benefit from disclosure 
of the compensation received by selling 
broker-dealers? Would that benefit 
depend on the types of compensation 
received or an underwriter’s direct 
versus indirect interaction with a 
customer, such as instances in which an 
underwriter is also broker of record for 
the customer (so-called ‘‘orphan 
accounts’’)?
Q. How should such disclosure 
requirements be applied to broker-
dealers that clear purchase transactions 
on behalf of other broker-dealers? 
Would it be adequate for a clearing firm 
to satisfy its disclosure requirements by 
setting forth its fee schedule for clearing 
covered securities, and disclosing the 
source of its compensation (e.g., selling 
broker-dealer or mutual fund 
complex)?
74
How would customers be 
informed about the conflicts of interest 
posed by promotional arrangements 
between clearing broker-dealers and 
fund complexes, such as arrangements 
by which a fund complex agrees to pay 
ticket charges imposed by a clearing 
broker-dealer, so the charges are not 
passed on to selling broker-dealers and 
their sales personnel?
E. Disclosure of Differential 
Compensation 
The Internet, supplemented with 
investors’ ability to call toll-free 
numbers to request mailed copies of 
required disclosures made on the 
Internet, also may provide a useful 
medium for broker-dealers to provide 
customers with quantitative information 
about differential compensation 
practices. As noted in the Proposing 
Release, conflicts of interest may result 
from practices by which an associated 
person is paid a heightened percentage 
of the broker-dealer’s compensation 
when he or she sells a fund that is 
favored by the broker-dealer (such as a 
fund that is affiliated with the broker-
dealer or that makes revenue sharing 
payments to the broker-dealer), and 
practices by which an associated person 
earns more for selling ‘‘class B’’ shares 
with deferred sales fees than other share 
classes because of the higher sales 
compensation received by the broker-
dealer firm for selling class B shares. 
Point of sale disclosure of differential 
compensation practices as proposed, 
however, would not cover situations in 
which an associated person has a 
financial incentive to sell securities that 
pay a relatively high dealer concession 
or commission to the broker-dealer, 
even though that would translate into a 
relatively high payment to the 
associated person.
75
Requiring Internet-based disclosure of 
a broker-dealer’s compensation 
practices, however, may provide an 
appropriate forum for disclosure of 
additional compensation incentives to 
sales personnel and other associated 
persons. Attachment 15 depicts how, 
under such a requirement, a broker-
dealer could use the Internet to 
illustrate the compensation incentives 
associated with relatively high dealer 
concessions, compared to comparable 
covered securities.
76
Under such an 
approach, multiple covered securities 
may be ‘‘comparable’’ if they are not 
materially different with respect to their 
investment objectives and goals, its 
principal investment strategies, and the 
principal risks that would result from 
investing in such a covered security. 
That disclosure also illustrates how the 
Internet could be used to illustrate and 
quantify differential compensation in 
connection with the sale of a class of 
covered securities that charges a 
deferred sales fee, and information 
about the payment of any other form of 
differential compensation to any 
associated persons in connection with 
the purchase of the covered security.
Request for comment. Should the 
Commission require broker-dealers to 
make enhanced disclosure of 
differential compensation on the 
Internet? Should the Commission also 
require broker-dealers to permit 
customers the ability to request the 
Internet-based disclosures be mailed to 
them by calling a toll-free telephone 
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10540Federal  Register/ Vol.  70,  No.  42 / Friday,  March  4,  2005 / Proposed  Rules  
77
An analogous issue arise in the distinct context 
of calculating comparative information. 
Comparative information should provide investors 
with context about whether a particular fund has 
relatively high or low ownership costs. In 
calculating comparative information, using 
groupings of securities that are overly narrow 
would not lead to data that adequately informs 
investors about the ownership costs associated with 
alternative investment. When identifying the 
presence or absence of differential compensation, 
however, groupings of securities that are overly 
broad (such as including no-load funds with load 
funds) may invariably lead to ‘‘yes’’ answers, which 
would not appear useful to investors.
78
Such a requirement would prevent broker-
dealers from providing responsive information that 
is obscured with excess verbiage. Such a 
requirement would mean that the information must 
be disclosed in tabular form in a highly visible 
location within a disclosure document, possible 
using easily navigable links within a particular 
webpage.
79
Such a requirement that the web site not be 
restricted in access does not preclude the broker-
dealer from taking down the web sit on occasion as 
necessary to perform technical maintenance.
80
Such a requirement would not apply to a 
broker-dealer that does not maintain a principal 
Internet homepage.
81
Moreover, we could require that broker-dealers 
update Internet-disclosed information promptly to 
maintain accuracy, and that information about 
payments received in the prior fiscal year be 
updated within 30 days of the end of that fiscal 
year.
82
Some relevant disclosures, such as dealer 
concessions and trailing commissions, may vary by 
the share class of the covered security. Other 
disclosures, such as revenue sharing payments, 
would appear less likely to differ according to share 
class.
83
More than one broker-dealer may receive 
compensation in connection with a customer’s 
purchase of a covered security. For example, a 
selling broker may receive the bulk of a sales fee, 
while the fund distributor retains a small portion 
of that fee. Also, introducing firms and clearing 
firms both may receive revenue sharing payments 
from a fund complex.
number? Commenters particularly are 
invited to discuss the following: 
Q. Should we require broker-dealers 
to identify any payment practice by 
which the issuer or underwriter of a 
covered security pays the broker-dealer 
a higher dealer concession than the 
average dealer concession paid in 
connection with the distribution of 
comparable covered securities, when 
that would lead an associated person of 
the broker-dealer to receive more in 
connection with the sale of the covered 
security than would be received in 
connection with the sale of the same 
dollar amount of a comparable covered 
security that pays an average dealer 
concession? For those purposes, should 
we state that the term ‘‘comparable’’ 
means another covered security that is 
not materially different with respect to 
its investment objectives and goals, its 
principal investment strategies, and the 
principal risks that would result from 
investing in such a covered security?
Q. Would such a requirement be 
feasible to implement? Would the 
resulting information be useful to 
investors? Commenters may wish to 
suggest criteria for identifying 
‘‘comparable’’ funds, or suggest existing 
databases or assessments that would be 
useful in identifying practical fund 
categories. For example, would it be 
appropriate for groupings of 
‘‘comparable’’ funds to be based on 
particular investment styles such as 
‘‘mid cap value’’ or industry sector 
funds? Would it be appropriate for such 
groupings to distinguish between index 
funds and actively managed funds? 
Would it be appropriate for broker-
dealer to determine that a particular set 
of funds are ‘‘comparable’’ if they fall 
within the same grouping set forth by a 
nationally recognized categorization of 
mutual funds, such as categorizations 
provided by major vendors of mutual 
fund data? Should the Commission seek 
to develop and publish lists of 
‘‘comparable’’ covered securities for 
these purposes? Alternatively, even if a 
focus on relatively narrow categories of 
funds would accurately reflect 
differences in broker-dealer 
compensation among categories, should 
the groupings of funds be broader to 
more fully inform investors about the 
differences in incentives facing broker-
dealer personnel?
77
Q. Should Internet disclosure of 
differential compensation related to 
share classes sold reflect higher 
payments for selling class C shares as 
well as for selling class B shares? 
F. Format of Disclosure 
The format of disclosure would be 
critical to any Internet disclosure 
requirements, as well as disclosure 
through any other media. Information 
may be presented on the Internet in a 
way that is intended to obscure, rather 
than to provide effective disclosure. 
Moreover, many investors may not have 
Internet access or choose to use the 
Internet. Accordingly, we would require 
that broker-dealers maintain a toll-free 
telephone number which investors 
could call to request that a copy of the 
Internet-based disclosure be mailed to 
them. 
To promote clear disclosure, we 
propose to require information to be 
highly visible, and depicted in a tabular 
format that is readily communicated to 
investors, using layout and presentation 
that is reasonably calculated to draw 
attention to the required information, 
and using terminology that is intended 
to clearly convey required information 
to the investor.
78
Other requirements 
that we could adopt as appropriate 
could include: (i) That the web site not 
(1) have password protection, (2) require 
entry of identifying information or e-
mail addresses, or (3) otherwise restrict 
access (including the use of 
‘‘cookies’’);
79
(ii) that disclosure be 
assessed through a prominent link on 
the principal Internet homepage of the 
broker-dealer;
80
and (iii) that the web 
site have a Uniform Resource Locator 
(URL) that is disclosed in conjunction 
with all point of sale and confirmation 
disclosures that the broker-dealer is 
required to make. We also could require 
broker-dealers to maintain toll-free 
telephone numbers by which investors 
can request a mailed copy of the 
disclosure information.
81
Any Internet disclosure requirement 
should require broker-dealers to depict 
information that is specific to share 
classes, as applicable.
82
We would 
anticipate that multiple broker-dealers 
may opt to maintain disclosure on a 
single webpage, with each recipient of 
a payment clearly identified.
83
Request for comment. How could an 
Internet disclosure rule be crafted to 
ensure that investors have clear and 
timely access to information? 
Commenters particularly are invited to 
discuss the following: 
Q. Should an Internet-based 
disclosure requirement mandate the use 
of a standardized template or form, or 
the use of certain terminology, perhaps 
as defined by the Commission? 
Commenters are invited to suggest 
models. 
Q. Should broker-dealers be permitted 
to establish links to third-party web 
sites where definitions or explanatory 
information would be available? Would 
this help investors better understand the 
meaning of particular terms without 
providing information that potentially is 
biased or otherwise misleading? 
Alternatively, would such a linkage to 
third-party web sites have the effect of 
seeming to endorse that information? 
Commenters may wish to refer to 
existing Internet web sites that contain 
glossaries or other models of 
terminology or explanatory materials 
that could effectively improve investor 
understanding of this information. 
Should the Commission instead adopt 
standardized definitions to be used in 
this context?
Q. What are the costs to broker-
dealers of making the kinds of Internet-
based disclosures discussed in this 
section? In addition, what are the cost 
savings to broker-dealers of making such 
Internet-based disclosures in lieu of 
making such disclosures at the point-of-
sale or on transactions confirmations? 
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10541Federal  Register/ Vol.  70,  No.  42 / Friday,  March  4,  2005 / Proposed  Rules  
84
See Proposing Release, Section VI. The 
Commission also proposed amendments to Form 
N–1A that would enhance disclosure of sales loads 
in the fund prospectus.
85
Proposed subparagraph (c) to Item 8 (now Item 
7) of Form N–1A.
86
We recently brought enforcement cases against 
fund advisers concerning their failure to adequately 
disclose arrangements for increased ‘‘shelf space’’ 
with various broker-dealer. See In the Matter of 
Franklin Advisers, Inc. and Franklin/Templeton 
Distributors, Inc., Investment Advisers Act Release 
No. 2337 (December 13, 2004); In the Matter of PA 
Fund Management LLC, et al., Investment Advisers 
Act Release No. 2295 (September 15, 2004); In the 
Matter of Massachusetts Financial Services 
Company, Investment Advisers Act Release No. 
2224 (March 31, 2004).
87
See the request for additional comment relating 
to the proposed definition of ‘‘revenue sharing’’ 
supra, part II.A.3.
Would there be cost savings or other 
efficiencies from maintaining 
disclosures for multiple broker-dealers 
on a single web page? 
Q. Is it appropriate and useful for the 
Commission to require that broker-
dealers update Internet-disclosed 
information promptly to maintain 
accuracy? Should the Commission also 
require that broker-dealers update 
information about payments received in 
the prior fiscal year within 30 days of 
the end of that fiscal year? 
Q. Would it be useful to investors if 
we require broker-dealers to maintain a 
toll-free number investors can call to 
request copies of the Internet-based 
disclosure be mailed to them? What 
procedures would be necessary to 
ensure compliance with this 
requirement? Commenters may wish to 
discuss the cost to broker-dealers of 
implementing such a requirement. 
V. Prospectus Disclosure of Revenue 
Sharing Payments 
Along with the amendments 
discussed above, the Commission 
proposed to amend Form N–1A in order 
to improve disclosure in fund 
prospectuses of revenue sharing 
payments.
84
If any person within a fund 
complex makes revenue sharing 
payments, the proposed amendment 
would have required a fund to disclose 
that fact in its prospectus and also to 
disclose that specific information about 
revenue sharing payments is included 
in the confirmation and point of sale 
disclosure as originally proposed.
85
We 
are considering whether to adopt 
modified or additional Form N–1A 
requirements to complement the 
disclosure by broker-dealers on which 
we are requesting comment in this 
release. Specifically, we are considering 
whether it may be helpful to investors 
to receive additional information in a 
fund’s prospectus regarding revenue 
sharing payments.
86
Request for comment. Are prospectus 
disclosure requirements regarding 
revenue sharing payments, beyond 
those we originally proposed, 
appropriate or necessary? Specifically, 
we seek comment on whether a brief 
description of such revenue sharing 
payments should be required in a 
mutual fund’s prospectus. 
Q. If any person within a fund 
complex makes revenue sharing 
payments, should a fund be required to 
disclose this fact in its prospectus? 
Should a fund be required to include 
information relating to these payments, 
such as the services provided in return 
for the payments; the factors considered 
in determining the payments to be made 
(including the number of fund shares 
sold by a financial intermediary, the 
amount of fund assets held through that 
intermediary, the redemption rate of 
fund shares held through that 
intermediary, and the quality of the 
intermediary’s relationship with the 
fund’s principal underwriters); and the 
basis on which such payments are made 
(e.g., percentage of total sales of fund 
shares by a financial intermediary, 
percentage of total fund assets 
attributable to that financial 
intermediary)? Should a fund also be 
required to disclose the maximum 
amount of revenue sharing payments to 
a single financial intermediary 
annually? If so, how should this 
disclosure be stated (e.g., as a dollar 
amount, a percentage of net assets, or 
otherwise), and what period of time 
should it cover (e.g., the most recent 
fiscal year, the projected total for the 
current fiscal year, or some other 
period)? Should any other information 
be required? 
Q. Should we also require disclosure 
of the aggregate amounts of revenue 
sharing payments that a fund makes to 
all financial intermediaries? If so, how 
should this disclosure be stated (e.g., as 
a dollar amount, a percentage of net 
assets, or otherwise), and what period of 
time should it cover (e.g., the most 
recent fiscal year, the projected total for 
the current fiscal year, or some other 
period)? Should any other information 
be required? 
Q. We also invite comment on the 
costs associated with providing 
enhanced disclosure in the prospectus 
relating to revenue sharing payments, 
including quantification of such 
payments. To what extent would the 
disclosure of specific information 
relating to such payments increase 
compliance costs? 
Q. If specific information about 
revenue sharing payments is available 
through a broker-dealer’s Web site or 
toll-free telephone number, should a 
fund be required to disclose that fact in 
its prospectus, either in addition or as 
an alternative to other disclosure? 
Q. For purposes of enhanced 
prospectus disclosure of revenue 
sharing payments, what definition of 
‘‘revenue sharing’’ should the 
Commission use? Should it be 
consistent with that used in connection 
with the proposed broker-dealer 
disclosure rules? Commenters are asked 
to address, among other things, the 
questions about the definition of 
‘‘revenue sharing’’ that are raised above 
in the context of the proposed broker-
dealer disclosure requirements.
87
Q. Commenters are also asked to 
address what, if any, disclosure 
requirements should be added to Forms 
N–3, N–4, and N–6 with respect to 
revenue sharing payments? In this 
context, we invite commenters to 
address the same questions raised above 
relating to disclosure of revenue sharing 
payments by mutual funds, as well as 
any other relevant matters. 
VI. General Request for Comment 
In addition to the supplemental 
requests for comment set forth above, 
the Commission renews its requests for 
comment on the proposals that were 
published in the Proposing Release. In 
its evaluation of further rulemaking 
action, the Commission will consider, in 
addition to the comments received in 
response to this release, all comments 
received in response to the Proposing 
Release.
By the Commission.
Dated: February 28, 2005. 
Margaret H. McFarland, 
Deputy Secretary.
BILLING  CODE  8010–01–P
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10544Federal  Register/ Vol.  70,  No.  42 / Friday,  March  4,  2005 / Proposed  Rules  
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10545Federal  Register/ Vol.  70,  No.  42 / Friday,  March  4,  2005 / Proposed  Rules  
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10557Federal  Register/ Vol.  70,  No.  42 / Friday,  March  4,  2005 / Proposed  Rules  
[FR Doc. 05–4215 Filed 3–3–05; 8:45 am] 
BILLING  CODE  8010–01–C
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10521Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 

What Is the Unsafe Condition Presented in 
This AD? 

(d) This AD is the result of several reports 
of failed shuttle control valves of the SVS 
and one report of an airplane crash with a 

fatality in which improper use of the SVS 
was a factor. The actions specified in this AD 
are intended to correct problems with the 
SVS before failure or malfunction during 
instrument flight rules (IFR) flight that can 

lead to pilot disorientation and loss of 
control of the aircraft.

What Must I Do To Address This Problem? 

(e) To address this problem, you must do 
the following:

Actions Compliance Procedures 

(1) Incorporate the airplane flight manual sup-
plement (AFMS) in the airplane flight manual 
with the appropriate revision in the FAA-ap-
proved airplane flight manual (AFM).

Within 30 days after the effective date of this 
AD, unless already done.

Not Applicable. 

(i) The owner/operator holding at least a private 
pilot certificate as authorized by section 43.7 
of the Federal Aviation Regulations (14 CFR 
43.7) may do the flight manual changes re-
quirement of this AD. 

(ii) Make an entry in the aircraft records show-
ing compliance with this portion of the AD 
following section 43.9 of the Federal Aviation 
Regulations (14 CFR 43.9). 

(2) Install placards described in the AFMS ....... Before further flight after incorporating the 
AFMS in the FAA-approved airplane flight 
manual (AFM) required by paragraph (e)(1) 
of this AD.

Follow the Standby Vacuum System AFM 
SUPPLEMENT, dated February 4, 2000. 

(3) Upgrade the Model SVS I or SVS IA SVS 
to the Model SVS VISVS, install the appro-
priate placards, and add the installation re-
port including the instructions for continued 
airworthiness (ICA) to the maintenance 
schedule for the aircraft.

Within 1 year after the effective date of this 
AD, unless already done.

Follow Precise Flight, Inc. Installation Report 
No. 08080, Standby Vacuum System Model 
VI—Shuttle Valve S/N 10243 & Subsequent 
(Manual Valve), Revision A, dated February 
21, 2001. 

(4) Do not install any Model SVS I or SVS IA 
SVS without also doing the actions required 
by paragraphs (e)(1), (e)(2) and (e)(3) of AD.

As of the effective date of this this AD ............ Not applicable. 

May I Request an Alternative Method of 
Compliance? 

(f) You may request a different method of 
compliance or a different compliance time 
for this AD by following the procedures in 14 
CFR 39.19. Unless FAA authorizes otherwise, 
send your request to your principal 
inspector. The principal inspector may add 
comments and will send your request to the 
Manager, Seattle Aircraft Certification Office 
(ACO), FAA. For information on any already 
approved alternative methods of compliance, 
contact Ms. Marcia Smith, Aerospace 
Engineer, FAA, Seattle Aircraft Certification 
Office, 1601 Lind Avenue, SW, Renton, 
Washington 98055–4065; telephone: (425) 
917–6484; facsimile: (425) 917–6590. 

May I Get Copies of the Documents 
Referenced in This AD? 

(g) To get copies of the documents 
referenced in this AD, contact Precise Flight, 
Inc., 63120 Powell Butte Road, Bend Oregon 
97701, telephone: (800) 547–2558; facsimile: 
(541) 388–1105; electronic mail: 
[email protected]; Internet: 
http://www.preciseflight.com/. To view the 
AD docket, go to the Docket Management 
Facility; U.S. Department of Transportation, 
400 Seventh Street, S.W., Nassif Building, 
Room PL–401, Washington, DC, or on the 
Internet at http://dms.dot.gov. The docket 
number is FAA–2004–19354.

Issued in Kansas City, Missouri, on 
February 23, 2005. 
David R. Showers, 
Acting Manager, Small Airplane Directorate, 
Aircraft Certification Service.
[FR Doc. 05–4239 Filed 3–3–05; 8:45 am] 
BILLING CODE 4910–13–P

SECURITIES AND EXCHANGE 
COMMISSION 

17 CFR Parts 239, 240 and 274 

[Release Nos. 33–8544; 34–51274; IC–
26778; File No. S7–06–04] 

RIN 3235–AJ11; 3235–AJ12; 3235–AJ13; 
3235–AJ14 

Point of Sale Disclosure Requirements 
and Confirmation Requirements for 
Transactions in Mutual Funds, College 
Savings Plans, and Certain Other 
Securities, and Amendments to the 
Registration Form for Mutual Funds

AGENCY: Securities and Exchange 
Commission.
ACTION: Proposed rule; reopening of 
comment period and supplemental 
request for comment. 

SUMMARY: The Securities and Exchange 
Commission (‘‘Commission’’) is 
reopening the comment period on 

proposed rules, published in January 
2004, that would require broker-dealers 
to provide their customers with 
information regarding the costs and 
conflicts of interest that arise from the 
distribution of mutual fund shares, 529 
college savings plan interests, and 
variable insurance products. The 
Commission also is supplementing its 
request for comments on the proposed 
rules to reflect issues raised by 
commenters, including feedback 
received from investors in in-depth 
interviews about revised forms for 
disclosing information at the point of 
sale. The Commission is publishing this 
supplemental request for comment and 
reopening the comment period to assure 
that the public has a full opportunity to 
address such issues in their comments.
DATES: Comments should be submitted 
on or before April 4, 2005.
ADDRESSES: Comments may be 
submitted by any of the following 
methods: 

Electronic Comments 

• Use the Commission’s Internet 
comment form (http://www.sec.gov/
rules/proposed.shtml); or 

• Send an e-mail to rule-
[email protected]. Please include File 
Number S7–06–04 on the subject line; 
or 

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10522 Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 

1 See Securities Exchange Act Release No. 49148 
(January 29, 2004), 69 FR 6438 (February 10, 2004) 
(‘‘Proposing Release’’).

2 College savings plans are often referred to as 
‘‘529 savings plans.’’

3 In the Proposing Release, and on the forms 
attached to the Proposing Release, we used the term 
‘‘revenue sharing’’ to refer to payments to broker-
dealers for promoting certain covered securities 
over others. However, investor feedback indicated 
that the term ‘‘revenue sharing’’ is not easily 
understandable. While we continue to refer to the 
term ‘‘revenue sharing payment’’ in this release, we 
have removed references to ‘‘revenue sharing’’ from 
the forms attached to this release and instead refer 
to payments broker-dealers receive for promoting 
certain covered securities over others. See infra part 
II.A.3.

4 The full text of comments to the proposal, 
including the text of standard letter types, is 
publicly available at: http://www.sec.gov/rules/
proposed/s70604.shtml.

5 In the Proposing Release, we proposed rule 
language to require confirmation disclosure of 
comparative information about certain costs and 
conflicts. This release does not address those 
proposed requirements, given that the content of 
comparison information and the form of disclosure 
(e.g., at the point of sale versus in confirmations) 
in large part will depend upon any final point of 
sale and confirmation requirements. At a later date 
and in a separate release, we plan to request further 
comments about comparison range disclosure 
requirements.

• Use the Federal eRulemaking Portal 
(http://www.regulations.gov). Follow the 
instructions for submitting comments. 

Paper Comments 
• Send paper comments in triplicate 

to Jonathan G. Katz, Secretary, 
Securities and Exchange Commission, 
450 Fifth Street, NW, Washington, DC 
20549–0609. All submissions should 
refer to File Number S7–06–04. This file 
number should be included on the 
subject line if e-mail is used. To help us 
process and review your comments 
more efficiently, please use only one 
method. The Commission will post all 
comments on the Commission’s Internet 
Web site (http://www.sec.gov/rules/
proposed.shtml). Comments also are 
available for public inspection and 
copying in the Commission’s Public 
Reference Room, 450 Fifth Street, NW, 
Washington, DC 20549. All comments 
received will be posted without change; 
we do not edit personal identifying 
information from submissions. You 
should submit only information that 
you wish to make available publicly.
FOR FURTHER INFORMATION CONTACT: 
With respect to Securities Exchange Act 
Rules 10b–10, 15c2–2, and 15c2–3, 
contact Catherine McGuire, Chief 
Counsel, Paula R. Jenson, Deputy Chief 
Counsel, Joshua S. Kans, Branch Chief, 
David W. Blass, Branch Chief, or John 
J. Fahey, Attorney, at (202) 942–0073, 
Office of Chief Counsel, Division of 
Market Regulation, Securities and 
Exchange Commission, 450 Fifth Street, 
NW., Washington, DC 20549–1001. 

With respect to Form N–1A, contact 
Deborah Skeens, Senior Counsel, at 
(202) 942–0721, Office of Disclosure 
Regulation, Division of Investment 
Management, Securities and Exchange 
Commission, 450 Fifth Street, NW, 
Washington, DC 20549–0506.
SUPPLEMENTARY INFORMATION: 

I. Introduction 
On January 29, 2004, the Commission 

issued, and requested comment on, two 
proposed new rules, as well as rule 
amendments under the Securities 
Exchange Act of 1934 designed to 
enhance the information broker-dealers 
provide to their customers in 
connection with transactions in certain 
types of securities.1 Proposed rules 
15c2–2 and 15c2–3 would require 
broker-dealers to provide their 
customers with targeted information, at 
the point of sale and in transaction 
confirmations, regarding the costs and 
conflicts of interest that arise from the 

distribution of mutual fund shares, 529 
college savings plan interests 2, and 
variable insurance products 
(collectively, ‘‘covered securities’’). The 
Commission also proposed conforming 
amendments to rule 10b-10, its general 
confirmation rule, as well as 
amendments to that rule to provide 
investors with additional information 
about call features of debt securities and 
preferred stock. Finally, the 
Commission proposed amendments to 
Form N–1A, the registration form for 
mutual funds, to improve disclosure of 
sales loads and revenue sharing 
payments.3

We received over one thousand 
separate comments on the proposed 
rules and rule amendments, as well as 
over four thousand comments from 
individuals and entities using a variety 
of standard letter types.4 Because 
proposed rules 15c2–2 and 15c2–3 were 
intended to provide clear and useful 
disclosure to investors, we actively 
encouraged comments from individual 
investors and investor groups. We also 
met with numerous investor groups, and 
engaged a consultant to assist in 
investor testing of possible forms for 
confirmation and point of sale 
disclosures.

The comments and other feedback we 
received suggest a number of areas 
where the proposed point of sale and 
confirmation disclosure requirements 
may need to be revised to more 
effectively communicate information to 
investors, while more efficiently 
balancing the benefits of disclosure 
against the costs of compliance. In 
addition, some feedback suggests that 
we should consider taking a more 
layered approach to disclosure by 
requiring broker-dealers to use the 
Internet as a disclosure medium to 
supplement point of sale and 
confirmation disclosure. 

Section II of this release discusses 
possible improvements to the proposed 
point of sale disclosure rule for 
transactions in covered securities. 

Section III discusses possible 
improvements to the proposed 
confirmation disclosure rule for 
transactions in covered securities. 
Section IV discusses the possible 
requirement for broker-dealers to 
disclose detailed information about 
revenue sharing payments and other 
broker compensation practices on the 
Internet. Section V discusses possible 
changes to the prospectus disclosure of 
revenue sharing. Section VI contains a 
general request for comments on this 
release and also renews our request for 
comments on the proposals in the 
Proposing Release.5

II. Point of Sale Proposal 
Proposed rule 15c2–3 was intended to 

improve investment decisionmaking by 
providing investors at the point of sale 
with information about costs and 
conflicts of interest associated with 
purchases of covered securities. 
Comments and investor feedback 
indicated, however, that while point of 
sale disclosure may be quite useful to 
investors, there are a number of areas 
that could be enhanced to make the 
proposed rule more effective. These 
include: (a) The content and format of 
the disclosure that would be required 
under the proposed rule, including the 
disclosure of ‘‘management fees’’ and 
‘‘other expenses’’ of the covered 
security; (b) the manner in which oral 
point of sale disclosures would be 
made; (c) the timing of delivery of point 
of sale disclosures; (d) exceptions to the 
requirement to deliver point of sale 
disclosures; and (e) special issues 
related to variable insurance products. 
We seek additional comment about 
these key areas, as detailed below. 

A. Content and Format of Proposed 
Point of Sale Disclosure for Covered 
Securities 

1. Brief Summary of Select Comments to 
the Proposing Release Relating to Point 
of Sale Disclosure 

We received substantial feedback on 
the point of sale forms that would be 
required under proposed rule 15c2–3. 
Some investors were confused by the 
use of industry jargon, such as ‘‘sales 
loads’’ and ‘‘revenue sharing,’’ in the 
forms attached to the Proposing Release. 

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10523Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 

6 AARP conducted its own investor testing, which 
further indicated that the proposed disclosure form 
was not effective in communicating information to 
many investors.

7 While many investors recognized that dollar-
based disclosure of future annual costs is 
hypothetical in nature, in that these costs would 
vary over time, they nonetheless concluded that 
such dollar-based disclosure would help them make 
better investment decisions. Consumer advocates 
also supported this change, stating that point of sale 
disclosure that failed to include information about 
fund management fees and other non-distribution 
costs could cause some investors to mistakenly 
believe that those additional costs of ownership are 
not present.

8 See Letter from Mary L. Shapiro, Vice Chairman, 
NASD, and President, Regulatory Policy and 
Oversight, NASD, to Jonathan G. Katz, Secretary, 
Commission, dated May 4, 2004; Letter from Mary 
L. Shapiro, Vice Chairman, NASD, and President, 
Regulatory Policy and Oversight, NASD, to 
Jonathan G. Katz, Secretary, Commission, dated 
August 20, 2004; Letter from Mike Scafati, Senior 
Vice President, A.G. Edwards & Sons, Inc., dated 
April 12, 2004; Letter from William Lutz, Professor 
of English, Rutgers University, to Jonathan G. Katz, 
Secretary, Commission, dated April 12, 2004; Letter 
from Nancy M. Smith to Jonathan G. Katz, 
Secretary, Commission, dated April 12, 2004; Letter 
from Nancy M. Smith to Jonathan G. Katz, 
Secretary, Commission, dated April 22, 2004; Letter 
from Amy B.R. Lancellotta, Acting General Counsel, 
Investment Company Institute, to Jonathan G. Katz, 
Secretary, Commission, dated April 12, 2004; 
Memorandum from the Division of Market 
Regulation regarding a meeting with representatives 
of the Investment Company Institute, dated October 
26, 2004; and Memorandum from the Division of 
Market Regulation regarding a meeting with 
representatives of the Securities Industry 
Association, dated October 26, 2004.

9 Some commenters also stated that the proposed 
disclosure requirement should not encompass 
payments that a broker-dealer receives for 
underwriting state bonds, or payments received by 
banks that are affiliated with broker-dealers, or 
certain payments that broker-dealers receive from 
affiliated fund complexes.

10 That particularly may be an issue with regard 
to payments received by fund ‘‘supermarkets’’ 
operated by certain broker-dealers.

11 Regardless of the characterization, a broker-
dealer’s receipt of special payments from some fund 
complexes but not others gives the broker-dealer 
monetary incentives to promote the sale of 
securities of the fund complexes that make those 
payments. That is true even if the payments solely 
reimburse the broker-dealer for sales and servicing 
costs it incurs.

12 The Commission retained Siegel & Gale, LLC 
and Gelb Consulting Group, Inc. to help develop 
and test model disclosure forms that would 
effectively convey information to investors. See 
Siegel & Gale, LLC/Gelb Consulting Group, Inc., 
‘‘Results of In-Depth Investor Interviews Regarding 
Proposed Mutual Fund Sales Fee and Conflict of 
Interest Disclosure Forms: Report to the Securities 
and Exchange Commission,’’ (November 4, 2004) 
and ‘‘Supplemental Report to the Securities and 

Exchange Commission’’ (November 29, 2004) 
(together, the ‘‘Siegel & Gale/Gelb Consulting 
Report’’). The report is available at http://
www.sec.gov/rules/proposed/s70604/rep110404.pdf 
and the supplemental report is available at http://
www.sec.gov/rules/proposed/s70604/sup-
rep010705.pdf.

13 Thus, for example, a customer contemplating 
buying class A mutual fund shares with an upfront 
sales fee would receive a form that would reflect 
that upfront fee in a standardized format, but a 
broker-dealer would not be required to include 
information about deferred sales fees, which are not 
applicable to class A shares.

14 As discussed below, those special costs may 
include, among others, account opening fees 
imposed by the issuers of college savings plans, or 
purchase or redemption fees imposed by funds.

15 This section discusses generally the proposed 
new point of sale disclosure forms for all covered 
securities. We recognize, however, that variable 
insurance products have special disclosure issues. 
We discuss additional forms more appropriate to 
those products in part II.E.

16 The proposed new ‘‘model’’ forms in 
Attachments 1–3 and 4–6 depict how the required 
forms would be filled in for hypothetical mutual 
funds or 529 savings plans, respectively.

Some stated that the definitions and 
explanatory materials were not as useful 
as they would have liked. Others stated 
that the forms did not adequately 
differentiate one-time costs from 
ongoing costs.6 Also, many investors 
wanted point of sale disclosure to 
provide comprehensive information 
about all the costs of owning covered 
securities, not just distribution-related 
costs. They sought comprehensive 
information about ownership costs, in 
percentage terms and in dollar terms, to 
better inform them about the total costs 
associated with purchasing and owning 
these securities.7

Some securities industry commenters 
urged the Commission to revisit the 
proposed requirement that point of sale 
disclosure be specific to the anticipated 
amount of the customer’s transaction, 
stating that such quantified disclosure 
would be difficult and costly to provide. 
Some saw standardized point of sale 
disclosure as preferable to transaction-
specific disclosure and some viewed 
point of sale disclosure as overly time-
consuming for broker-dealers to deliver, 
particularly over the telephone. 

Some commenters suggested specific 
changes to the wording and layout of 
the proposed point of sale forms, and 
provided alternative forms for us to 
consider.8 In addition, we received 

several comments about the proposed 
‘‘yes or no’’ point of sale disclosure of 
whether a broker-dealer or its affiliates 
receive revenue sharing from a person 
within a fund complex. The disclosure 
requirement, including proposed 
definitions of ‘‘revenue sharing’’ and 
‘‘fund complex,’’ in general would have 
required a broker-dealer to disclose 
whether it receives certain payments 
from affiliates of the issuer of the 
covered security, but not from the issuer 
itself. Disclosure about special 
compensation arrangements was 
intended to alert customers to those 
conflicts of interest and promote further 
inquiry.

One commenter suggested that the 
disclosure requirement relating to 
revenue sharing should be more 
focused, stating that the proposal would 
encompass payments unrelated to the 
distribution of covered securities 
purchased by a customer.9 Commenters 
also expressed concern that the 
provisions of the proposed rules relating 
to revenue sharing would lead to 
inconsistent disclosure depending upon 
how payments are depicted by a fund 
complex, particularly in light of the 
proposed exclusion for payments by 
issuers.10 Some commenters also 
suggested that such payments merely 
constitute ‘‘cost sharing’’ by which fund 
families compensate broker-dealers for 
services that the fund families otherwise 
would incur.11

2. Revised Point of Sale Disclosure 
Forms 

In response to the comments we 
received to the Proposing Release, we 
sought feedback from investors and 
have developed revised forms that we 
are considering adopting.12 Broker-

dealers would be required to deliver 
these proposed new forms at the point 
of sale before a customer purchases a 
covered security. Consistent with 
investors’ views that disclosure should 
be targeted and should exclude 
irrelevant information, broker-dealers 
would not use a ‘‘one size fits all’’ form 
to provide written point of sale 
disclosure to customers. Instead, while 
broker-dealers would have to disclose 
specific categories of information in a 
required format to the extent those 
categories are applicable, the written 
point of sale forms would omit 
categories of information that are not 
applicable to a particular purchase.13 
This targeted approach would limit 
‘‘information overload’’—which can 
undercut the effectiveness of highly 
detailed disclosure—and also would 
facilitate disclosure of special costs 
associated with particular securities.14 It 
therefore should lead to disclosure that 
is as standardized as possible, while 
targeted enough to be useful to a wide 
range of investors. We would hope that 
investors would request, and broker-
dealers would provide, forms for 
different share classes where applicable 
and where consistent with suitability 
obligations, in order to help investors 
make informed investment decisions.

Consistent with those principles, the 
forms in Attachments 1–6 reflect 
feedback we have received through 
investor outreach about how to improve 
the clarity and readability of the forms, 
as well as additional analysis about how 
to improve their cost-effectiveness.15 
Attachments 1–3 show proposed new 
‘‘models’’ of required point of sale 
disclosure forms filled in for a 
hypothetical mutual fund,16 with the 

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10524 Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 

17 There are potential disclosure efficiencies 
associated with standardized disclosure, such as the 
use of preprinted forms. At the same time, however, 
our testing has shown that many investors want 
information at the point of sale that is specific to 
the anticipated amount of their purchase. The 
proposed new forms are intended to strike a balance 
between the use of standardized disclosure and the 
ability for interested investors to receive more 
personalized information. 

In developing these new proposed forms, we 
considered disclosing information based on a 
$10,000 hypothetical investment. However, our 
investor testing indicated that disclosure based on 
a $1,000 hypothetical investment should permit 
customers to more easily estimate the costs for their 
actual purchase amount than disclosures based on 
a $10,000 hypothetical investment. Furthermore, 
disclosure of information based on hypothetical 
$50,000 and $100,000 investments provide 

additional context and also illustrate the effect of 
breakpoint discounts on upfront sales loads 
(referred to on the forms and in this release as 
‘‘sales fees’’ for mutual funds).

18 Whenever an upfront sales fee is charged, the 
amount of the investment is less than what the 
customer pays.

19 The ‘‘investment amount’’ could be defined to 
equal the customer’s total payment less the upfront 
sales fee.

20 The amount of any back end sales fee depends 
on the time an investor sells the covered security 
and the net asset value of the covered security at 
that time, the actual amount of the fee would not 
be known at the point of sale.

21 Broker-dealers would not be required to 
include the amounts of revenue sharing payments 
on the point of sale disclosure forms, or on 
transaction confirmations. This differs from the 
proposed rules described in the Proposing Release. 
Some investors expressed more interest in 
information about the existence of the conflict of 
interest created by the revenue sharing payments 
than the amounts paid under revenue sharing 
arrangements. While descriptive information about 
the conflicts posed by revenue sharing 
arrangements is necessary to inform customers 
about the conflicts of interest facing their agents, as 
discussed below in part IV, Internet-based 
disclosure may be a preferable means for giving 
investors detailed and more thorough information 
about revenue sharing payments their broker-dealer 
receives and the conflicts of interest those payments 
create.

22 As proposed, point of sale disclosure of 
differential compensation practices would not cover 
situations in which an associated person has a 
financial incentive to sell securities that pay a 
relatively high dealer concession or commission to 
the broker-dealer, even though that could translate 
into a relatively high payment to the associated 
person. That type of compensation incentive was 
not proposed to be captured at the point of sale due 
to the need to keep point of sale disclosure simple 

differences among the forms reflecting 
differences in share classes and other 
pricing attributes. Attachments 4–6 
show proposed new ‘‘models’’ for the 
required point of sale disclosure forms 
filled in for a hypothetical 529 savings 
plan, again reflecting differences in 
pricing. Following is a summary of 
some of the key aspects of these forms:

a. Clarity of the forms. We believe that 
the forms in Attachments 1–6 are clearer 
and easier to understand than the point 
of sale forms attached to the Proposing 
Release. Where possible, we have used 
plain English in the forms, rather than 
using industry jargon. In addition, 
broker-dealers would be required to 
deliver forms in the same format, 
including font size and layout, as that of 
Attachments 1–6. 

b. Identification of security subject to 
disclosure. Broker-dealers would be 
required to more clearly identify the 
security subject to disclosure in the 
forms. For example, in the case of 
mutual funds, this would include the 
disclosure of the fund’s ticker symbol (if 
applicable). In the case of 529 savings 
plans, this would include disclosure of 
the specific age-based or other portfolio 
within the plan, if applicable, and the 
name of the state that sponsors the plan, 
if that name otherwise would not be 
identified. Disclosure of point of sale 
information for 529 savings plan 
interests also would include brief text 
reminding customers to consider the 
potential tax benefits of investing in the 
plan of their home state. 

c. Combined use of standardized and 
transaction-specific cost disclosure. 
Costs associated with investments in 
covered securities would be shown 
using standardized $1,000, $50,000 and 
$100,000 payment or investment 
amounts. In addition, if a customer 
requests at the point of sale, broker-
dealers would be required to use ‘‘fill in 
the blank’’ boxes to disclose cost 
information reflecting the customer’s 
anticipated payment amount.17

d. Presentation of sales fee disclosure. 
Based on the standardized payment 
amounts (for securities with an upfront 
sales fee)18 or investment amounts (for 
other securities), broker-dealers would 
be required to disclose on the forms 
sales fees in dollars and as a percentage 
of the amount invested.19 For securities 
with an upfront sales fee, the forms 
would contain an additional column for 
the net amount invested. Broker-dealers 
would be required to disclose the back 
end sales fee on the form as a 
‘‘maximum’’, reflecting the highest back 
end fee a customer could expect to pay 
if the investment did not appreciate or 
depreciate.20 Broker-dealers would also 
be required to disclose on the forms a 
brief statement about the possible 
availability of breakpoint discounts, 
referred to on the forms as ‘‘volume 
discounts.’’

e. Comprehensive annual cost 
disclosure. In the Proposing Release, we 
proposed to require broker-dealers to 
disclose only distribution-related costs. 
However, in response to the comments 
and investor testing described above, we 
now propose to require broker-dealers to 
disclose on the proposed new forms 
comprehensive information about all 
the costs of owning the securities 
subject to disclosure, including 
investment company costs such as 
‘‘management fees’’ and ‘‘other 
expenses’’ that are disclosed in the 
prospectus. The disclosure of those 
costs would be made in both dollar 
terms and as a percentage of investment 
value. Because our investor testing 
showed that disclosure of costs appears 
to be most effective when all the 
components of the costs are identified, 
broker-dealers would be required to 
show the breakdown of annual costs by 
category. In addition, they would be 
required to disclose any flat annual fees, 
such as the account fee illustrated on 
Attachment 1. 

f. Disclosures tailored to share class 
and pricing structure. Broker-dealers 
would be required to tailor point of sale 
disclosures to reflect particular share 
classes or other pricing structures that 
are applicable to a contemplated 

purchase. Accordingly, point of sale 
disclosure would be required for all 
share classes and pricing structures, not 
just the front-end, back-end, and ‘‘level 
load’’ structures set forth in the 
attachments (commonly referred to as A, 
B, and C share classes). Broker-dealers 
selling any other share classes or pricing 
structures would be required to provide 
the applicable disclosures from the 
attached forms.

g. Disclosure of all share classes 
under consideration. A broker-dealer 
would have to provide point of sale 
information with regard to all share 
classes that are under consideration at 
the point of sale, including share classes 
other than the typical A, B, and C share 
classes. 

h. Disclosure of revenue sharing 
arrangements. Broker-dealers would be 
required to disclose the existence of 
revenue sharing payments they receive 
for promoting covered securities as a 
conflict of interest. Consistent with the 
proposed Internet disclosure 
requirements discussed below, broker-
dealers would also be required to 
disclose on the point of sale forms an 
Internet Web site and a toll-free 
telephone number customers can use to 
find more detailed information about 
disclosures of those payments, 
including the amounts of, and sources 
of, the payments.21

i. Disclosure of special incentives to 
broker-dealer sales personnel. Broker-
dealers would be required to disclose 
the fact, if true, that they pay their 
personnel proportionately more for 
selling the covered security than for 
others (i.e., whether they pay 
differential compensation) or for selling 
certain share classes over others.22 The 

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10525Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 

and the risk that such disclosure either would 
invariably lead to a ‘‘yes’’ answer or else would be 
too unwieldy at the point of sale. See Proposing 
Release n. 105.

23 As with disclosure of revenue sharing 
payments, investors in general expressed more 
interest in information about costs they would pay 
than in information about how broker-dealers were 
compensated. Accordingly, the forms would not 
require disclosure of the standard dealer concession 
that broker-dealers receive to sell the covered 
security. As discussed below in part IV, Internet-
based disclosure may be a preferable means for 
giving customers quantified information about how 
their brokers are being compensated. 

Because we prohibited the use of brokerage to 
promote distribution in September 2004, point of 
sale disclosure of information about portfolio 
brokerage commissions no longer would be 
necessary. See Investment Company Act Release 
No. 26591 (Sept. 2, 2004), 69 FR 54728 (Sept. 9, 
2004). The NASD has adopted a corresponding 
amendment to its rules governing broker-dealers, 
and NASD rules for several years have prohibited 
member broker-dealers from favoring or disfavoring 
any fund based on expected brokerage 
commissions. See Securities Exchange Act Release 
No. 50883 (Dec. 20, 2004), 69 FR 77286 (Dec. 27, 
2004).

forms would inform investors of where 
to find out more detailed disclosures of 
broker compensation and the special 
incentives paid to sales personnel for 
selling certain funds over others.23

j. Reference to the fund prospectus as 
the primary source of information about 
the fund. Broker-dealers would be 
required to include a statement that 
customers should consider all costs, 
goals and risks before purchasing a 
covered security, direct customers to the 
security’s prospectus or official 
statement for more information, and 
inform customers that the broker-dealer 
can provide those documents, including 
the disclosure regarding special 
incentives. 

k. Permissive omission of categories 
where no information is applicable. 
Broker-dealers would be able to omit 
any categories of information that are 
not applicable. For example, if the 
disclosure on the forms about a conflicts 
of interest is ‘‘NO,’’ broker-dealers 
could, but are not required to, omit that 
disclosure. 

3. Request for Additional Comments 

Would the proposed new point of sale 
disclosure forms outlined above and 
attached improve decisionmaking by 
providing investors with the right 
information about covered securities 
prior to purchasing those securities? 
Commenters are invited to discuss the 
effectiveness of the proposed point of 
sale disclosure forms in Attachments 1–
6 and to suggest alternatives and 
modifications. Commenters specifically 
are invited to discuss: 

Q. Clarity of the forms. Do the 
proposed new forms in Attachments 1–
6 strike an appropriate balance between 

the use of plain English and the need for 
specific disclosure of information about 
the costs and conflicts associated with 
purchases of covered securities? Is the 
terminology used in the forms easily 
understandable? If not, how should it be 
modified? For example, should the 
disclosure of annual fees on the forms 
include the term ‘‘12b–1 fee’’ to refer to 
annual distribution and service fees 
paid to broker-dealers for selling a 
covered security? Should the disclosure 
of conflicts of interest on the forms 
include the term ‘‘revenue sharing,’’ so 
that investors may connect the 
information on the forms with 
information they receive through other 
disclosure documents or the media? 
Would the use of the terms ‘‘12b–1 fee’’ 
and ‘‘revenue sharing’’ be confusing? If 
so, what other terms are appropriate 
substitutes? Also, are there other terms 
that should be included on the forms? 

• Is it appropriate for the Commission 
to mandate the format of the forms, 
including font size and layout? If the 
format of the forms is not mandated, is 
it likely, either intentionally or 
unintentionally, that broker-dealers 
would obscure the information being 
disclosed?

• Should the forms contain a ‘‘date 
line’’ where the broker-dealer would be 
required to fill in the date when the 
point of sale disclosures were 
communicated to the investor? Would 
such a requirement aid in assuring 
compliance with the rule? For point of 
sale information delivered orally, 
should broker-dealers be required to 
notify the customer that the information 
is current as of the date of disclosure? 

• Should the forms contain a 
‘‘signature line’’ which customers 
would be required to sign to evidence 
receipt of the point of sale disclosures? 
Would such a requirement aid in 
assuring compliance with the rule? 
Could it cause broker-dealers to make 
point of sale disclosures later in the 
selling process in order to avoid having 
customers sign multiple disclosure 
forms? How would such a ‘‘signature 
line’’ requirement be implemented for 
oral point of sale disclosures? 

Q. Identification of security subject to 
disclosure. Do the attached proposed 
forms appropriately set forth the 
covered security’s issuer and class or 
pricing structure, ticker symbol (if 
applicable), and other portfolio or fund 
designations as necessary to identify the 
security and differentiate it from the 
issuer’s other securities? 

• In a transaction involving a 529 
savings plan interest or variable 
insurance product, point of sale 
disclosure would be required to 
encompass costs related to a number of 

underlying securities (such as 12b–1 
fees imposed at the level of the 
underlying security), and conflicts 
related to underlying securities (such as 
revenue sharing paid for distribution of 
those securities). Should broker-dealers 
be required to inform investors that the 
information being disclosed reflects 
costs and conflicts arising from 
securities underlying the covered 
security that is being directly 
purchased, as well as the costs and 
conflicts directly applicable to the 
covered security? Should broker-dealers 
also be required to disclose the identity 
of the securities underlying the covered 
security that is being directly 
purchased? Are there certain 
circumstances where such disclosure 
should be required, such as when that 
information is not otherwise available? 

• For interests in a 529 savings plan, 
should broker-dealers be required to 
identify a specific age-based portfolio or 
other portfolio within the plan, to the 
extent a specific portfolio has been 
identified at the point of sale? 
Alternatively, if the underlying portfolio 
has not been identified at the point of 
sale, should the broker-dealer be able to 
provide a disclosure document setting 
forth maximum costs (i.e., maximum 
sales fee and maximum annual 
ownership costs) associated with all 
portfolios underlying the plan? To what 
extent do investors purchase interests in 
529 plans without already having 
identified the underlying portfolio for 
the investment? If the state sponsoring 
a plan is not otherwise identified, 
should the broker also be required to 
disclose the name of the state in order 
to help customers determine whether 
they may be entitled to state tax 
deductions or other benefits for 
investing in that state’s plan? 

• Some states offer state tax benefits 
for investments in the 529 savings plans 
they sponsor. If residents of those states 
invest in a different state’s 529 savings 
plan, they generally would not be 
eligible to receive the state tax benefits. 
Attachments 4–6 include a brief text 
reminding customers to consider the 
potential tax benefits of investing in a 
plan sponsored by their home state. Is 
this disclosure appropriate? Should it be 
modified, narrowed, or expanded? 

Q. Combined use of standardized and 
transaction-specific cost disclosure. The 
proposed new forms would combine 
disclosure of standardized information 
with disclosure of transaction-specific 
information upon customer request, or 
in accordance with a broker-dealer’s 
standard practice. Does this approach 
appropriately balance the cost savings of 
standardized disclosure with the 
effectiveness of transaction-specific 

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10526 Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 

disclosure? Should the Commission 
require that the brokers disclose 
transaction-specific information in all 
situations, and not just upon request? 
Alternatively, are there certain 
situations or products for which 
transaction-specific information should 
always be required? 

Q. Presentation of sales fee disclosure. 
Would the disclosure of upfront sales 
fees in the forms in Attachments 1–6—
with separate columns for payment 
amount, fee in dollars, investment and 
fee as a percentage of net investment—
effectively communicate information 
about the amount of those fees and their 
immediate impact on investment? If not, 
how should the forms be modified? 
Would it be appropriate to exclude the 
impact of letters of intent, rights of 
accumulation, purchases by related 
parties, or other customer-specific 
discounts, in light of the additional 
costs and complexity that could be 
associated with their inclusion? 

• For disclosure of upfront sales fees, 
should the ‘‘investment amount’’ equal 
the customer’s payment less the amount 
of the sales fee? Should other fees, such 
as broker-imposed commissions or 
purchase fees, be deducted to determine 
the ‘‘investment amount’’? 

• Would the proposed disclosure of 
deferred sales fees in the forms—with 
separate columns for investment 
amount, maximum fee in dollars and fee 
as a percentage of investment amount—
effectively communicate information 
about the potential amount of those 
fees? Would focusing on maximum 
amounts of those fees, rather than 
providing year-by-year breakdowns, 
effectively convey information about 
those fees’ potential impact? 

Q. Comprehensive annual cost 
disclosure. Would the proposed method 
of disclosing comprehensive annual 
costs in the forms in Attachments 1–6—
with separate columns for investment 
amount and fees in dollars and fee as a 
percentage of investment amount—
effectively communicate illustrative 
information about the potential amount 
of, and likely variations in, those costs? 
Would the proposed new point of sale 
disclosure forms adequately put 
investors on notice that the disclosed 
amount of the annual costs are 
illustrative, and that actual amounts are 
likely to vary? Should the forms include 
a statement that such annual costs 
would not be directly taken out of the 
investor’s accounts—and would not be 
subject to separate disclosure as they are 
incurred—but rather would 
continuously be paid out of the assets of 
the funds the investor has purchased 
(including underlying funds in two-

tiered 529 savings plan interests and 
variable insurance products)? 

• Should point of sale disclosure 
include all the costs to the investor 
associated with owning covered 
securities (including mutual fund 
management and other costs), and not 
only distribution costs? If not, what 
costs should be included? Commenters 
are also invited to discuss whether 
investors perceive the economic impact 
of costs differently based on whether 
costs are charged directly or indirectly 
(i.e., fees that are deducted from fund 
assets). 

• Should we require each category of 
annual fee to be separately quantified in 
percentage terms, as set forth in the 
proposed new forms? Should we require 
the aggregate of those annual ownership 
fees also to be quantified in dollar terms 
(based on the potential quantification 
standards discussed above)? Are there 
better ways to inform investors about 
the scope of those costs in dollar terms 
and to help investors understand the 
economic consequences of annual fees 
on an investment? 

• Should point of sale disclosure set 
forth information about account fees 
that issuers may charge to typical 
investors in the covered security (other 
than fees that apply only in limited 
circumstances, such as returned check 
fees)? Should such account fees be 
expressed as a fixed dollar amount and/
or as a percentage of assets (whichever 
is applicable)? If fees are applied only 
on accounts that are valued below a 
specified amount, should this threshold 
amount be disclosed? Commenters are 
also invited to discuss how disclosure of 
such fees could be expected to influence 
customers’ decisions to purchase 
covered securities. Commenters also are 
invited to identify other fees that should 
be disclosed at point of sale, and discuss 
how disclosure could be done 
effectively.

• We also invite comment on the 
costs associated with providing dollar 
quantification of comprehensive fees, 
including the extent to which disclosure 
of transaction-specific information upon 
a customer’s request would increase 
compliance costs. 

• We note that the approach 
discussed here would require broker-
dealers to make certain disclosures 
based on estimates, such as estimates of 
future first year ownership costs 
calculated with a total annual fee 
percentage that is derived from expense 
ratios reported in the current 
prospectus. The dollar estimates of 
those future first year costs also would 
be based on the assumption that the net 
asset value of an investment would not 
change during the first year following 

the investment. Broker-dealers would be 
required by rule to deliver those 
estimates, even though future outcomes 
may well differ from the estimates. 
Should the Commission address 
concerns about exposure to unfair 
private actions, for example, by 
requiring additional disclosures or 
providing a safe harbor? We would not 
expect private rights of action to result 
from non-fraudulent disclosures under 
the rule even if, for example, a broker-
dealer erred by negligently transposing 
numbers between information in the 
prospectus and information reported at 
the point of sale. 

Q. In addition to disclosing cost 
information category-by-category (e.g., 
sales fees and annual ownership costs), 
should point of sale disclosure also 
depict ownership costs on an aggregate 
basis? Alternatively, should aggregate 
information be disclosed in lieu of 
category-by-category disclosure? Mutual 
fund prospectuses are required to 
estimate the total expenses associated 
with a $10,000 investment over one, 
three, five and ten year time horizons, 
based on an assumed five percent return 
and other assumptions. Those estimates 
help investors quantify the combined 
impact of disparate ownership costs 
such as sales fees and ongoing 
ownership costs. Those estimates also 
facilitate comparisons among share 
classes and funds. Would point of sale 
disclosure of information that similarly 
quantifies the aggregate impact of 
multiple cost categories provide a useful 
supplement to, or replacement for, 
category-by-category disclosure of 
ownership costs? If so, should 
disclosures of aggregate information 
reflect a range of investment amounts 
(such as $1,000, $50,000 and $100,000), 
consistent with other cost disclosures 
on the written point of sale form? On 
the other hand, would disclosure of 
aggregate cost information as a 
supplement to category-by-category 
information potentially confuse some 
investors by leading them to believe that 
those aggregate costs would be incurred 
in addition to other disclosed costs, 
rather than being an alternative way of 
expressing those costs? Would 
disclosure of aggregate information as a 
supplement to category-by-category 
information threaten to pose 
‘‘information overload’’ that would 
reduce some investors’’ use of point of 
sale disclosure? Would aggregate 
information be suitable as a replacement 
for disclosure of category-by-category 
information? Alternatively, would 
aggregate information be inadequate as 
a replacement for category-by-category 
information? For example, would 

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10527Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 

24 Disclosure of aggregate cost information also 
may facilitate the disclosure and use of comparative 
information at the point of sale. That is because it 
may be easier for many investors to weigh a single 
aggregate cost amount against the benchmark posed 
by the aggregate cost average and range for 
alternative funds, than it would be to separately 
weigh the comparative context of upfront sales fees, 
deferred sales fees and annual ownership costs. As 
discussed above, we expect to address possible 
requirements for disclosure of comparative 
information in a later release.

25 Other pricing structures would include 
purchase and redemption fees some funds charge 
and which are paid into fund assets rather than for 
distribution.

26 For example, in the Proposing Release the 
Commission set forth a generic point of sale form 
that was not specific to any particular share class 
or pricing structure.

27 Such an approach would be an alternative to 
the proposed requirement that the broker-dealer 
identify payments received from persons within a 
‘‘fund complex’’, including affiliates of the fund but 
not the fund issuer.

28 While a commenter has suggested that the 
revenue sharing disclosure requirement be limited 
to payments ‘‘in connection with’’ the sale or 

distribution of covered securities, such an approach 
may inject too great an element of subjectivity into 
the disclosure requirement, by permitting a broker-
dealer to characterize a particular payment as not 
distribution-related, and claim no need to disclose 
it. It may be more effective to implement an 
approach that requires disclosure of the types of 
payments that can be expected to compensate 
broker-dealers for distribution, and that does not 
reach to other payments.

29 As defined in the Proposing Release, the dealer 
concession consists of fees earned by the broker-
dealer at the time of sale from the issuer or its agent, 
the distributor or another broker-dealer.

30 The point of sale rules propose an exception for 
underwriters. Even if a targeted underwriter 
exclusion were adopted, however, such a carve-out 
might be inappropriate at times, such as when an 
underwriter is broker of record on an ‘‘orphan’’ 
account originated by another broker-dealer.

aggregate information fail to explicitly 
inform investors about the types and 
timing of ownership costs that they 
would incur if they purchase a covered 
security? Further, would aggregate 
information be inadequate because its 
accuracy depends on the accuracy of 
underlying assumptions? Commenters 
are invited to suggest models by which 
aggregate cost information could be 
disclosed clearly on written point of 
sale forms as a supplement to, or a 
replacement for, category-by-category 
information.24

Q. Disclosures tailored to share class 
and pricing structure. Should the 
Commission adopt separate forms for all 
share classes and pricing structures?25 
In the alternative, should the 
Commission adopt an additional form 
that would permit disclosure of all 
potential costs for all share classes and 
pricing structures of mutual fund and 
529 savings plan investments, including 
purchase and redemption fees that are 
paid into fund assets?26 How could 
disclosure of the costs of owning classes 
of covered securities that are not 
illustrated by one of the forms attached 
as Attachments 1–6 (or funds with 
different pricing structures than those 
illustrated) be efficiently implemented?

• Do the proposed new forms 
appropriately require disclosure of 
information about fees customers must 
pay upon purchase or redemption that 
are retained in fund assets (as distinct 
from sales loads and commissions that 
are paid to broker-dealers)? Should the 
required disclosure of redemption fees 
reflect the duration of such redemption 
fees? Should this type of disclosure be 
required to be quantitative or narrative, 
depending on the fee being disclosed? 
For example, should redemption fees 
imposed on short-term holdings (such 
as holdings of 180 days or less) be 
disclosed in narrative terms, with other 
redemption fees disclosed the same way 
that back-end sales loads would be 
disclosed (consistent with the 

quantification standards discussed 
above)? Should it include other 
information about other costs of owning 
covered securities not otherwise 
required to be disclosed in our proposed 
rules and forms, such as the one-time 
application fees that some states charge 
upon initial investments in their 529 
savings plan interests? Is the placement 
of the disclosure of the application fee 
on the B and C class disclosures for 529 
plans appropriate? 

Q. Disclosure of all share classes 
under consideration. Would it be 
appropriate to require a broker-dealer to 
provide point of sale information with 
regard to all share classes that are under 
consideration at the point of sale? 

Q. Disclosure of revenue sharing 
payments. Do the point of sale 
disclosure forms in Attachments 1–6 
provide sufficient information about 
revenue sharing arrangements, 
including where to find more detail 
about those arrangements, to inform 
customer’s investment decisions? In 
light of concerns expressed by 
commenters, including investors, that 
complex disclosures potentially could 
distract investors from other important 
information, is it appropriate to omit the 
sources and amounts of revenue sharing 
payments received by the broker-dealer 
from point of sale disclosures and 
require them instead to be disclosed on 
the Internet and made available to 
customers upon request through a toll-
free number? On the other hand, 
investors may find this information 
useful at the point of sale. Should we 
require the disclosure of the source and 
amount of revenue sharing payments at 
the point of sale? Commenters are 
invited to discuss how revenue sharing 
information can be disclosed simply 
and efficiently. 

• Should the requirement to disclose 
the existence of revenue sharing 
payments focus on payments, either to 
a broker-dealer or its affiliate, that are 
directly or indirectly funded by some or 
all of the following: an investment 
adviser; a principal underwriter; and an 
administrator or transfer agent of the 
issuer of the covered security (and of 
issuers of underlying securities with 
regard to two-tiered products)? 27 
Should the disclosure requirement 
extend to payments from issuers and/or 
from other parties not specifically 
identified above? 28 Would such a 

requirement be adequate to prevent 
evasion of the proposed disclosure 
obligation? The revenue sharing 
disclosure obligation set forth in the 
Proposing Release focused on payments 
received from persons ‘‘within the fund 
complex.’’ Under this targeted approach 
to disclosure of revenue sharing 
payments, would it be appropriate to 
eliminate the definition of ‘‘fund 
complex’’?

• Should the proposed definition of 
‘‘revenue sharing’’ be replaced by a 
definition of ‘‘promotional payment’’ to 
more accurately reflect the nature of 
such payments? If the required 
disclosure were to be targeted, as 
discussed above, to payments received 
from investment advisers, principal 
underwriters, administrators or transfer 
agents, should the definition of either 
‘‘revenue sharing’’ generally encompass 
payments from an investment adviser, 
principal underwriter, administrator or 
transfer agent to a broker-dealer or 
associated person? Should payments 
that constitute dealer concessions be 
excluded from the definition because 
dealer concessions do not raise the same 
conflicts as special compensation 
arrangements, which warrant special 
disclosure? 29 Should payments funded 
by asset-based distribution fees (such as 
rule 12b–1 fees) be excluded because 
they would be included elsewhere in 
the point of sale disclosure? Should 
payments that represent compensation 
for providing services as a principal 
underwriter of a covered security be 
included or do those payments not pose 
the same conflicts of interest? 30

Should payments to an issuing 
insurance company from funds 
underlying variable insurance products 
be included? What conflicts do these 
payments pose? Would other inclusions 
or exclusions be appropriate? 

• If the revenue sharing disclosure 
were targeted, as discussed above, 
should the required disclosure exclude 
payments made ‘‘solely in connection’’ 

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10528 Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 

31 Such a definition would be consistent with 
other securities laws provisions that identify 
investment company affiliates in part depending on 
whether two companies hold themselves out as 
related companies. See, e.g., Exchange Act rule 
15a–6 (defining term ‘‘family of investment 
companies’’ in part based on whether registered 
investment companies that share the same 
investment adviser or principal underwriter ‘‘hold 
themselves out to investors as related companies for 
purposes of investment and investor services’’); 
Investment Company Act rule 11a–3 (defining term 
‘‘group of investment companies’’ in part based on 
whether registered open-end investment companies 
hold themselves out to investors as related 
companies for purposes of investment and investor 
services).

32 Securities activities by banks are subject to a 
different regulatory regime, so long as the banks 
meet applicable exceptions and exemptions from 
the definitions of ‘‘broker’’ and ‘‘dealer’’ set forth 
in Sections 3(a)(4)(B) and 3(a)(5)(B) of the Exchange 
Act and the rules thereunder. See also Securities 
Exchange Act Release No. 50618 (Nov. 1, 2004) 
(order extending temporary exemption of banks, 
savings associations, and savings banks from the 
definition of ‘‘broker’’ under Section 3(a)(4) of the 
Exchange Act).

33 For example, would it be reasonable to 
conclude that payments received by an associated 
person (including a second broker-dealer or a bank) 
are solely in connection with the distribution 
activities of a second broker-dealer or a bank—and 
hence to fall within such an exclusion—if the 
payments are comprised of transaction-based 
streams that are linked solely to transactions 
effected by that other broker-dealer or bank, or if the 
payments are comprised of asset-based streams that 
are linked solely to assets held by customers of that 
other broker-dealer or bank?

34 For instance, if the disclosing broker-dealer and 
the affiliated broker-dealer each have sold roughly 
the same amount of covered securities on behalf of 
the fund complex in the past year, and the two 
broker-dealers each received roughly the same 
amount of such miscellaneous payments, then 
would it be reasonable for the disclosing broker-
dealer to conclude that the miscellaneous payments 
received by the affiliated broker-dealer were solely 
in connection with the affiliated broker-dealer’s 
distribution activities? If, in contrast, the affiliated 
broker-dealer received materially more of those 
miscellaneous revenue sharing payments then the 
disclosing broker-dealer, while relative sales still 
were roughly the same, then would the disclosing 
broker-dealer reasonably have to inform the 
customer about those payments?

with securities issued by a person that 
is not a ‘‘related issuer’’ of the issuer of 
the covered security? If so, would a 
definition of ‘‘related issuer’’ 
appropriately encompass the issuer of 
the covered security (and underlying 
securities in the case of two-tiered 
products), and the issuers of other 
covered securities that hold themselves 
out as related companies for purposes of 
investment or investor services, as well 
as other affiliated issuers? 31 Would 
there be better ways of excluding 
payments that are intended to promote 
the sale of a covered security other than 
the security that the customer is 
considering purchasing?

• If the required revenue sharing 
disclosures were targeted in such a way, 
should the disclosure requirement 
further exclude payments received by 
an associated person if the broker-dealer 
making the disclosure reasonably 
determined that the associated person 
received those payments solely in 
connection with the distribution of 
covered securities by a different broker-
dealer or by a bank? 32 Are there other 
ways of excluding payments to affiliates 
that would not pose conflicts of interest 
for the broker-dealer and would pose 
fewer compliance challenges? Would 
such an exclusion for payments 
received by affiliates that are linked 
solely to a second broker-dealer’s 
distribution activities be justified in part 
by the expectation that the second 
broker-dealer would be required to 
provide point of sale disclosures to put 
its own customers on notice of those 
payments? Should such an exclusion 
apply if payments received by an 
affiliate are not solely linked to the 

distribution activities of a second 
broker-dealer or a bank?

• If payments received by an affiliate 
of a broker-dealer would not have to be 
disclosed if they are ‘‘solely connected’’ 
with the distribution activities of 
another broker-dealer or a bank, what 
facts and circumstances should a 
broker-dealer have to consider to 
determine whether revenue sharing 
received by an affiliate are in fact 
‘‘solely connected’’ with the distribution 
activities of another broker-dealer or a 
bank? 33 In the case of payments that do 
not represent transaction-based or asset-
based payment streams, such as 
payments that are designated as 
compensation for seminar sponsorship, 
should the broker-dealer be permitted to 
avoid having to disclose payments 
received by an affiliated broker-dealer if 
the payments that it receives and the 
payments that the affiliated broker-
dealer receives are reasonably 
proportional to the relative size of the 
two broker-dealers’ distribution 
activities? 34

• Would such a comprehensive 
alternative to revenue sharing 
disclosure, including the possible 
elimination of the definition of ‘‘fund 
complex,’’ adequately exclude payments 
that a broker-dealer receives in 
connection with underwriting 
municipal bonds? 

• Is the description in the attached 
forms of the conflict that arises as a 
result of revenue sharing arrangements 
readily understandable? If not, how 
should it be modified? Should the term 
‘‘revenue sharing’’ be explicitly stated in 
the description of the conflict or would 
this term be confusing? 

Q. Disclosure of special incentives to 
broker-dealer sales personnel. Broker-

dealers would be required to disclose on 
the proposed new forms, if true, that 
sales personnel are paid more for selling 
the covered security over other 
securities. Is this disclosure 
appropriate? Is it useful to investors? Is 
the language used to describe this 
conflict of interest appropriate? Should 
point of sale disclosure of differential 
compensation practices cover situations 
in which securities pay a relatively high 
dealer concession or commission to the 
broker-dealer, rather than only the 
situation where a broker-dealer provides 
an extra financial incentive to its sales 
personnel for selling a covered security? 

• In light of concerns expressed by 
commenters that overly complex 
disclosures could distract investors from 
other important information, is it 
appropriate and helpful to omit 
quantified information about dealer 
concessions from point of sale 
disclosures and require it instead to be 
disclosed on the Internet, as discussed 
below? 

• In addition, the attached forms for 
class B and class C shares would require 
disclosure of the fact, if true, that sales 
personnel are paid more for selling 
those classes of securities than class A 
shares. Is this disclosure appropriate? Is 
it helpful to investors? Should it appear 
on the forms for other classes of shares? 

• Do the references pointing investors 
to the broker-dealer’s Web site for more 
information about ‘‘special incentives’’ 
adequately inform investors of where 
they can find more details about 
revenue sharing payments? Should 
other terms be used, such as ‘‘extra 
incentives’’ or ‘‘conflicts of interest’’? 

Q. References to the fund prospectus 
as the primary source of information 
about the fund. Would the approach for 
disclosure of other information on the 
forms in Attachments 1–6 (apart from 
ownership costs and conflicts of 
interest), such as the fact that investors 
should take other factors into account 
when making investment decisions, 
strike a reasonable balance between 
disclosure that is easy to understand 
and disclosure that is appropriately 
comprehensive? 

Q. Permissive omission of categories 
where no information is applicable. 
Would it be appropriate to permit 
broker-dealers to omit categories of 
information that are not applicable, or 
should disclosure of such categories be 
required to promote comparability? 
Should conflict of interest information 
be presented in all situations to provide 
investors with full conflict information 
about all funds they are considering? 
Should some sections be required to be 
omitted if inapplicable, such as sections 
on upfront fees for forms for variable 

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10529Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 

35 As discussed more fully below, we are 
considering ways to combine written and oral point 
of sale disclosure. We would expect any written 
disclosure supplementing oral point of sale 
disclosure to be provided contemporaneously.

36 Under the latter type of arrangement, the 
broker-dealer would not be able to ‘‘round up’’ the 
standardized disclosure amount to reduce the 
apparent percentage sales fee communicated 
through oral disclosure. For example, if the 
anticipated amount of the payment is $85,000, 
standardized information with regard to a $50,000 
model payment may be more appropriate for 
disclosure of upfront sales fees than standardized 
information with regard to a $100,000 model 
payment, if the $50,000 model more accurately 
depicts the percentage sales fee associated with the 
customer’s anticipated payment.

37 Such an alternative would not permit a broker-
dealer to require a customer to ‘‘opt into’’ point of 
sale disclosure, but simply would allow a customer 
to affirmatively ‘‘opt out’’ of such disclosure.

38 See Proposing Release, n. 155 (discussing the 
impact of rounding).

annuities that do not charge them? 
Would disclosure of some inapplicable 
information (for example, the fact, if 
true, that a broker-dealer is not paid 
extra for promoting one fund over 
others) serve to educate investors, or 
enhance their understanding of the 
remaining disclosure?

• In addition, would it be appropriate 
to permit broker-dealers to omit all 
point of sale information, thereby 
eliminating all point of sale disclosures, 
in circumstances where there are no 
distribution-related expenses or 
conflicts of interest required to be 
disclosed at the point of sale? Would 
such an approach create a competitive 
advantage for funds that take advantage 
of such an exception? Would any such 
advantage be appropriate? 

B. Oral Disclosure of Point of Sale 
Information 

Commenters expressed a variety of 
views about the proposed requirement 
for point of sale information to be 
disclosed orally when the point of sale 
occurs through means of oral 
communication other than at an in-
person meeting (such as through a 
telephone conversation). Some 
consumer advocates questioned whether 
oral disclosure ever would be 
appropriate in light of difficulties 
associated with monitoring compliance 
and the need to give investors the 
opportunity to consider the point of sale 
information when making investment 
decisions. Some securities industry 
commenters suggested replacing oral 
disclosure with Internet-based 
alternatives or after-the-fact disclosure. 
Others stated that a verbatim reading of 
the point of sale form would not be 
practical and that disclosure of 
summary information should be 
sufficient. Commenters also stated that 
customers should be able to opt out of 
disclosure in certain circumstances, 
such as when orders are placed through 
automated telephone systems. 

As the comments indicate, oral point 
of sale disclosure poses special 
challenges given the difficulty that 
could be associated with hearing 
complex information without 
simultaneously seeing it. However, we 
are concerned that Web site disclosure 
or after-the-fact disclosure could be 
ineffective at providing investors with 
key information about costs and 
conflicts contemporaneous with 
investment decisions as point of sale 
disclosure. Moreover, we are concerned 
that requiring broker-dealers to provide 
all point of sale disclosures in writing 
prior to accepting an order might 
preclude investors from purchasing 

mutual funds and related securities over 
the telephone without undue delay.35

In light of these concerns, we believe 
that one possible way to make oral point 
of sale disclosure more effective could 
be to require broker-dealers to provide 
oral point of sale information that is 
either: (A) Quantified to reflect the 
anticipated amount of the purchase; or 
(b) quantified to reflect a standardized 
purchase amount—$1,000, $50,000 or 
$100,000—that would be appropriate 
based on the customer’s anticipated 
payment and the fee schedule of the 
covered security (or $1,000 if that 
amount is not readily estimable), 
supplemented by transaction-specific 
quantification upon the investor’s 
request.36

A second possibility could be to 
clarify that oral disclosure would not 
require a verbatim reading of the written 
disclosure form. Instead, in addition to 
the quantitative information discussed 
above, broker-dealers would be required 
to provide summary qualitative 
information about whether they receive 
revenue sharing payments or engage in 
differential compensation practices, as 
well as to disclose other information 
useful to investors (some of which are 
suggested in the questions below). This 
could include requiring disclosure that 
they are required to provide transaction-
specific quantified information upon the 
customer’s request (if such transaction-
specific information has not been 
provided as a matter of course). Under 
such an approach, broker-dealers would 
be able to omit categories of costs that 
are not applicable to a contemplated 
purchase. 

A third possibility could be to permit 
a broker-dealer using an automated 
telephone system to receive customer 
purchase orders to program the system 
to convey the required point of sale 
information about sales fees and then 
allow customers to elect not to listen to 
information, other than about sales fees, 
that otherwise would have to be 
disclosed in a written disclosure 
document. Such an exception could 

accommodate the preference of some 
investors not to hear point of sale 
information, while helping to ensure 
that investors at a minimum are 
provided with information about sales 
fees. This alternative would not appear 
appropriate when a customer 
communicates with a natural person 
associated with a broker-dealer as part 
of the process of placing an order 
because, in these circumstances, the 
natural person would be well positioned 
to provide disclosure and respond to 
investor questions.37

Request for comment. The 
Commission generally seeks comment 
on oral point of sale disclosure. To make 
oral point of sale disclosure more 
effective, should the Commission adopt 
one of the alternatives outlined above, 
or some combination of the alternatives? 
Would any of the alternatives be more 
effective than others? Would some 
combination of the alternatives be 
effective? Should the Commission 
require the broker-dealer to provide an 
investor a written copy of the disclosure 
form following each oral conversation? 
Should that disclosure be limited to an 
oral conversation that results in the 
customer placing an order? Are there 
other alternatives not discussed above 
that would make oral point of sale 
disclosure more effective? Commenters 
specifically are invited to address:

Q. Would the proposed revised 
quantification standards for oral 
disclosure better permit investors to 
obtain sufficient information about the 
costs of owning covered securities than 
our original proposal? Would this 
approach provide investors with a 
reasonable amount of specificity 
without ‘‘information overload’’? If not, 
what other approaches should the 
Commission consider? Are disclosures 
based on standardized $1,000, $50,000 
or $100,000 amounts appropriate? 
Would different or additional 
standardized amounts be appropriate 
(e.g. $10,000)? Should we adopt 
additional requirements to inform 
customers that the costs they may incur 
may be different than those disclosed at 
the point of sale due to the effects of 
rounding? 38

Q. When point of sale disclosure is 
made orally, would it be practical to 
require broker-dealers to disclose that 
they are required to provide transaction-
specific quantified information upon the 
customer’s request (if such transaction-
specific information has not been 

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10530 Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 

39 For example, an order-based trigger would not 
appear practical when a broker-dealer can solicit 
transactions and receive compensation without 
executing customer orders (such as may be present 
in so-called ‘‘check and application’’ arrangements), 
because in these circumstances the purchase may 
be completed before the soliciting broker-dealer is 
even aware of the order.

40 Some commenters have suggested that point of 
sale information should be disclosed only when a 
broker-dealer recommends a transaction, not when 
a customer places an unsolicited order. However, 
when a broker-dealer does not specifically 
recommend the securities it is selling, investors 

provided as a matter of course)? Would 
it lead to practical and effective 
disclosure if we were to require broker-
dealers to disclose that investors should 
consider all costs, goals and risks 
associated with potential investments 
before making purchases, and that 
related information is available in the 
applicable prospectus or official 
statement which the broker-dealer can 
provide to the customer? Would it lead 
to practical and effective disclosure if 
we were to require a broker-dealer to 
inform customers that they can inquire 
about special incentives that the broker-
dealer may receive to sell the covered 
security? If not, how should we require 
that a broker-dealer provide an investor 
with adequate disclosure about these 
special incentives? 

Q. If a customer is contemplating 
buying a security with an upfront sales 
fee, would it be appropriate and useful 
for the customer to receive disclosure 
that he or she may qualify for fee 
discounts if the customer or members of 
the customer’s family holds other shares 
from the fund family, or if the investor 
agrees to make additional purchases? 
Should broker-dealers have to disclose 
additional types of qualitative 
information? If so, what sort of 
information? For any such category of 
information, should the rules permit the 
broker-dealer to omit any disclosure 
conditioned on the broker-dealer’s 
providing the customer with additional 
information in writing at a later time? 
Should there be any other conditions a 
broker-dealer would have to meet before 
being able to do so? 

Q. Would it be useful to investors to 
require broker-dealers to disclose that 
investors should consider all costs, 
goals and risks associated with potential 
investments before making purchases, 
and that related information is available 
in the applicable prospectus or official 
statement which the broker-dealer can 
provide to the customer? Would it be 
useful to investors to require a broker-
dealer to inform customers that they can 
inquire about special incentives that the 
broker-dealer may receive to sell the 
covered security? If not, how should we 
require that a broker-dealer provide an 
investor with sufficient disclosure about 
these special incentives? 

Q. Would it be useful to investors if 
the Commission were to clarify that 
when providing oral disclosure a 
broker-dealer must provide summary 
qualitative information about whether a 
broker-dealer receives revenue sharing 
payments or engages in differential 
compensation practices? What other 
information would be useful to 
investors to receive if broker-dealers 
were permitted to summarize qualitative 

information? Are there compliance 
procedures that would help ensure that 
permitting broker-dealers to summarize 
qualitative information would not lead 
to situations where brokers obscure the 
information being disclosed? 

Q. Would it be appropriate to allow 
investors using automated telephone 
order systems to ‘‘opt out’’ of receiving 
certain oral point of sale disclosures? If 
so, what categories of information 
should be mandated and what 
categories subject to the opt-out right? If 
investors could opt out, would they still 
receive sufficiently helpful information 
to make an investment decision? Could 
an exception permitting customers to 
‘‘opt out’’ of oral point of sale disclosure 
for orders taken via automated 
telephone systems be subject to 
manipulation intended to deter delivery 
of point of sale disclosure? What 
limitations could minimize or eliminate 
this potential? Should we require 
broker-dealers to send written point of 
sale disclosures to customers who opt 
out of oral point of sale disclosures for 
orders taken via automated telephone 
systems? 

Q. Would it be helpful to investors 
who receive oral point of sale disclosure 
to receive both the quantitative 
information discussed above, as well as 
summary qualitative information about 
whether their broker-dealer receives 
revenue sharing payments or engages in 
differential compensation practices? Is 
there a minimum amount and/or type of 
information that should be mandated for 
oral point of sale disclosure? What 
should be the required key items to help 
investors make informed investment 
decisions? 

Q. Would it be appropriate to permit 
broker-dealers to make Internet-based 
disclosures or e-mail disclosures to 
those customers who consent to 
electronic delivery? Should Internet-
based or e-mail disclosures be made in 
the same format as that of the proposed 
point of sale disclosure forms? On what 
basis should the Commission permit a 
broker-dealer to do this? What 
limitations or procedures should apply 
to help ensure that customers actually 
receive written disclosures at the point 
of sale? 

C. Timing of Point of Sale Disclosure 
The proposed definition of ‘‘point of 

sale’’ would have determined the timing 
of disclosure through a two-tiered 
approach. In general, the proposed rule 
would have required disclosure 
‘‘immediately prior’’ to acceptance of 
the order. In circumstances in which a 
broker-dealer could solicit transactions 
and receive compensation without 
opening customer accounts or handling 

customer orders, however, disclosure 
would have to have been received upon 
initial communication with a customer. 

Consumer advocates stated that 
investors should receive disclosure 
earlier in the sales process to have 
adequate time to consider the 
information when making investment 
decisions. They suggested adding a 
time-of-recommendation component to 
trigger the disclosure. Some securities 
industry commenters suggested that 
point of sale disclosure could be 
provided most efficiently at the time of 
account opening. Some also indicated 
that the proposed communication-based 
standard would be difficult to 
implement and would lead to 
duplicative disclosure. 

The timing of point of sale disclosure 
is critically important, as investors 
should receive information early enough 
in the sales process to give them 
adequate time to consider the 
information, but not so early that they 
receive multiple disclosures for 
securities they may not be interested in 
purchasing. The timing of the point of 
sale trigger also should reflect the 
various ways in which customers may 
convey orders.39

Request for comment. The 
Commission solicits comment on the 
timing of point of sale disclosure. 
Should the Commission adopt a revised 
‘‘point of sale’’ definition that would 
allow investors to receive disclosure 
earlier in the sales process than they 
would have in the initial proposal? If so, 
how should the Commission define the 
‘‘point of sale’’ to promote timely 
disclosure while minimizing 
implementation and compliance 
difficulties? Commenters are also 
requested to discuss the following 
issues relating to the ‘‘point of sale’’ 
definition:

Q. How could the general point of sale 
trigger be moved earlier in the sales 
process while remaining meaningful? 
For example, should it be based on the 
earlier of the time that a customer 
expresses a ‘‘preliminary intent’’ to 
purchase the covered security or the 
time that a broker-dealer recommends a 
covered security? 40 If so, should the 

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10531Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 

may wish to scrutinize whether the fees they are 
paying to the broker-dealer, and the rersulting 
reduciton in net investment and in return on their 
money, are justified by the relatively limited 
services they receive. Moreover, even absent an 
explicit recommendation, a broker-dealer can 
influence a customer’s investment decision through 
the way it presents investment options. Allowing 
disclosure to vary depending on whether a 
recommendation has occurred also may give some 
broker-dealers the incentive to inappropriately 
assert that they are not making recommendations 
when in fact they are.

41 We recognize that requiring earlier point of sale 
disclosure also may impact other proposed rule 
requirements. For example, one proposed provision 
of the point of sale rule states that orders would 
only be ‘‘indications of interest’’ prior to point of 
sale disclosure being provided. Some commenters 
criticized that provision as facilitating rescission 
based on ‘‘buyer’s remorse,’’ and as potentially 
promoting market timing. Some commenters also 
raised operational questions related to that 
provision, such as how trades would be unwound 
(including whether the issuer would have to enter 
into an offsetting trade or whether the broker-dealer 
would simply bear a monetary loss). An earlier 
point of sale trigger, in combination with other 
investor remedies for broker-dealer violations of 
securities regulations, may influence our 
consideration of whether explicit ‘‘indication of 
interest’’ language would be appropriate.

42 The proposed point of sale rule included an 
exception for periodic purchases.

43 Money market funds, including funds that may 
be purchased through brokerage ‘‘sweep’’ accounts, 
may bear asset-based distribution fees and may be 
associated with revenue sharing payments.

44 Does the inclusion of disclosure based on 
standardized purchase amounts help to address that 
potential problem?

45 NASD rules 2211(a)(3) and 3110(c)(4), in 
conjunction, designate the following persons as 
‘‘institutional investors’: (i) A bank, savings and 
loan association, insurance company, or registered 
investment company; (ii) an investment adviser 
registered with the Commission or with a state 
securities commission (or any agency or office 
performing like functions); (iii) any other entity 

Continued

standard for disclosure ‘‘immediately 
prior’’ to receipt of the order be retained 
as a backstop if disclosure otherwise is 
not provided earlier? What regulatory 
requirements or compliance procedures 
could help ensure that such an option 
would be treated as a backstop, rather 
than the primary option for timing the 
delivery of point of sale information? 41

Q. How could the point of sale trigger 
avoid disclosure gaps when a broker-
dealer solicits and is compensated for 
an order, but does not execute the 
order? In these circumstances, should 
the point of sale be the later of the time 
the broker-dealer ‘‘first communicates’’ 
with the customer about the covered 
security, or the time the customer 
expresses a ‘‘potential interest’’ in 
purchasing the covered security? Would 
other standards for the definition of 
‘‘point of sale’’ better provide timely 
disclosure, while reflecting the fact that 
there may be an ongoing dialogue 
between the broker-dealer and the 
customer? If so, what would those 
standards be? 

D. Exceptions to Point of Sale Disclosure 
Requirements 

1. Exception for Subsequent Purchases 
of a Particular Covered Security and 
Class 

Some commenters urged the 
Commission to implement a point of 
sale exception that encompasses an 
investor’s non-periodic purchases of a 
covered security following his or her 
initial purchase.42 In their view, the 
critical decision related to an 

investment in a covered security is 
made prior to the investor’s first 
purchase of that security, and requiring 
point of sale disclosure for subsequent 
purchases would be duplicative and 
unlikely to promote informed 
investment decisionmaking.

Request for comment. We solicit 
comments on the appropriateness and 
necessity of point of sale disclosure for 
subsequent non-periodic purchases of a 
covered security. Would a subsequent 
purchase exception appropriately 
balance the goal of enhancing 
investment decisionmaking with 
reducing potentially duplicative 
disclosures? Commenters specifically 
are invited to discuss: 

Q. How could a point of sale 
exception for subsequent purchases of a 
covered security be crafted to reduce 
disclosures that otherwise would be 
redundant? Should such an exception 
be absolute, or should it require 
occasional redundant disclosure to 
accommodate investors who might have 
been distracted at the time of the initial 
point of sale disclosure, or might have 
forgotten about it because substantial 
time has passed since receiving the 
disclosure? 

Q. To address the possibility that 
prior point of sale information becomes 
outdated, should the exception be 
limited by how much time separates the 
original transaction and the subsequent 
transaction, such as six months, 12 
months, or some other time period? 
Should such an exception require the 
broker-dealer periodically to provide the 
customer with some or all of the 
information that otherwise would be 
provided at the point of sale? Should 
broker-dealers be permitted to satisfy 
such a requirement by providing 
standardized point of sale forms 
periodically to the customer? Should a 
subsequent purchase exception be 
conditioned on the broker-dealer 
providing transaction-specific point of 
sale disclosures upon the customer’s 
request? Should an investor be able to 
request point of sale disclosure and thus 
override an exception? What other 
conditions or limitations would be 
appropriate for such an exception? 

Q. Should such an exception apply to 
purchases of money market funds? If so, 
how? Should broker-dealers be required 
to make disclosure about money market 
funds at the time the customer funds a 
brokerage account? 43

Q. To what extent could an exception 
for subsequent purchases be subject to 

abuse by unscrupulous salespersons 
who seek to obscure the impact of 
distribution costs by following a 
relatively modest initial sale that bears 
small distribution costs with a much 
larger subsequent sale, without 
disclosure at the latter time? 44 Are there 
ways, such as limiting the subsequent 
sale exception to purchases in amounts 
equal or less than the initial purchase, 
that would help prevent such abuse? 
How would such a limitation affect 
broker-dealer system costs?

Q. How narrowly should an exception 
for subsequent purchases be drafted? 
Would it be enough to limit such an 
exception to purchases of a covered 
security having the issuer, program 
series (or portfolio in the case of 529 
savings plans), and share class (or 
pricing structure in the case of variable 
insurance products) for which the 
customer previously received point of 
sale disclosure from the broker-dealer? 
In the case of 529 savings plans and 
variable insurance products, should 
such an exception be further limited to 
subsequent purchases of the same 
portfolio or directed to the same 
subaccounts? 

Q. Would the use of Internet web sites 
help customers receive point of sale 
information when making subsequent 
purchases? For example, would making 
standardized point of sale information 
available on the Internet be a useful 
means by which broker-dealers would 
be required to provide point of sale 
information upon subsequent 
purchases, to customers who want 
additional information but are willing to 
accept Internet-based disclosure? 

Q. Commenters are invited to estimate 
the total number of transactions that 
would be subject to any such exception, 
as well as the potential cost savings to 
broker-dealers. 

2. Exception for Purchases by 
Institutional Investors 

In proposing rule 15c2–3, we 
requested comment about whether to 
include an exception for purchases by 
institutional investors. Several 
commenters supported such an 
exception, and one recommended that 
we refer to NASD rules to define 
‘‘institutional investor.’’ 45

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10532 Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 

(whether a natural person, corporation, partnership, 
trust, or otherwise) with total assets of at least $50 
million; (iv) a governmental entity or subdivision 
thereof; (v) an employee benefit plan that meets the 
requirements of Section 403(b) or Section 457 of the 
Internal Revenue Code and has at least 100 
participants (but not including any participant of 
such a plan); (vi) a qualified plan, as defined in 
Section 3(a)(12)(C) of the Act, that has at least 100 
participants (but not including any participant of 
such a plan); (vii) an NASD member or registered 
associated person of such a member; and (viii) a 
person acting solely on behalf of any such 
institutional investor.

46 The $50 million threshold is consistent with 
NASD rules.

47 That $50 million threshold would be consistent 
with the ‘‘qualified investor’’ definition set forth in 
Section 3(a)(54) of the Exchange Act.

48 Such natural persons may be institutional 
investors under NASD rules.

49 The definition of ‘‘qualified investor’’ in 
general encompasses: (i) Investment companies 
registered with the Commission; (ii) issuers eligible 
for an exclusion from the definition of investment 
company pursuant to section 3(c)(7) of the 

Investment Company Act; (iii) banks, savings 
associations, brokers, dealers, insurance companies, 
or business development companies; (iv) certain 
small business investment companies licensed by 
the U.S. Small Business Administration; (v) certain 
benefit plans; (vi) certain trusts; (vii) market 
intermediaries exempt under section 3(c)(2) of the 
Investment Company Act; (viii) associated persons 
of a broker-dealer other than a natural person; (ix) 
foreign banks; (x) foreign governments; (xi) 
corporations, companies, or partnerships that own 
and invest not less than $25 million on a 
discretionary basis; (xii) any natural person who 
owns and invests not less than $25 million on a 
discretionary basis; (xiii) any government or 
political subdivision, agency, or instrumentality of 
a government who owns and invests not less than 
$50 million on a discretionary basis; and (xiv) 
multinational or supranational entities or related 
agencies or instrumentalities. See Section 3(a)(54) 
of the Exchange Act.

50 See supra n. 44.

51 As set forth in the Proposing Release, this 
exception would have been available only to 
broker-dealers that receive no compensation for 
effecting transactions for customers that have no 
accounts with them. Moreover, the exception would 
have been conditioned on the broker-dealer 
providing, within the prior six months, information 
about the maximum potential size of sales loads, 
and asset-based sales charges and service fees, 
associated with covered securities sold by that 
broker, dealer or municipal securities dealer, as 
well as statements about whether the broker, dealer 
or municipal securities dealer receives revenue 
sharing or portfolio brokerage commissions or pays 
differential compensation.

Request for comment. We request 
additional comment regarding the 
advisability, scope and limitations of 
such an exception. In particular, if the 
Commission were to adopt an exception 
for purchases by institutional investors, 
how could we define ‘‘institutional 
investor’’ to limit the exception to 
transactions with persons who may be 
expected to have sufficient financial 
sophistication to make point of sale 
disclosure unnecessary? Commenters 
are specifically invited to discuss: 

Q. Should a definition of 
‘‘institutional investor’’ include banks, 
savings associations, insurance 
companies, or registered investment 
companies? 

Q. Should it include other entities, 
including corporations, partnerships 
and trusts, with total assets of at least 
$50 million? 46 Should a $50 million 
threshold also apply to government or 
political subdivisions, or other 
government agencies or 
instrumentalities? 47

Q. Should natural persons with assets 
of at least $50 million be included 
within the definition of ‘‘institutional 
investor’’? 48 Commenters may also wish 
to discuss the extent to which including 
natural persons would not be necessary 
if a point of sale exemption for 
transactions subject to investment 
adviser discretion, discussed below, 
were adopted.

Q. Should a definition of 
‘‘institutional investor’’ include persons 
acting solely on behalf of any other 
person who meets that definition? 
Should a definition of ‘‘institutional 
investor’’ be extended to other persons? 
Should it instead be based on the 
definition of ‘‘qualified investor’’ set 
forth in Section 3(a)(54) of the Exchange 
Act? 49 Alternatively, should the 

definition be based on the related 
definitions set forth in NASD rules? 50

Q. Should any exception for 
purchases by institutional investors be 
conditioned on the broker-dealer 
providing point of sale disclosure upon 
an institutional investors’ request? 
Would other conditions be appropriate 
for such an exception? 

Q. Commenters are also invited to 
estimate the cost savings to broker-
dealers if a point of sale exception for 
purchases by institutional investors is 
adopted. Commenters are invited to 
include an estimate of the total number 
of transactions that would be subject to 
any such exception, and to discuss 
whether broker-dealer compliance 
systems would be readily able to 
identify transactions with such persons. 

3. Exception for Transactions Subject to 
Investment Adviser Discretion 

Proposed rule 15c2–3 included an 
exception to point of sale disclosure for 
transactions in which the broker-dealer 
exercises investment discretion. 
Commenters generally supported this 
exception. Some commenters 
recommended extending the exception 
to transactions in which an investment 
adviser exercises investment discretion 
for the customer. Absent such an 
exception, the rule would require 
broker-dealers to provide or to send 
information to the investment adviser 
acting on behalf of the customer. 

Request for comment. If the 
Commission were to adopt an exception 
to point of sale disclosure for 
transactions in which an investment 
adviser exercises investment discretion, 
should it be limited to investment 
advisers that are registered either with 
the Commission under Section 203 of 
the Investment Advisers Act of 1940, or 
with a state securities commission or 
agency or office performing like 
functions? Should the broker-dealer be 
required to provide point of sale 

information upon the request of the 
investment adviser? If so, should we 
require that the information be 
delivered in the same time frame as 
other required point of sale disclosures? 

4. Potential Changes to Exception for 
Mailed Orders 

Proposed rule 15c2–3 included a 
limited exception for transactions 
received from a customer via U.S. mail, 
messenger delivery or similar third-
party delivery services.51 The purpose 
of an exception for mailed-in orders is 
to promote effective disclosure while 
avoiding the need to delay the execution 
of orders received via mail or similar 
services. It was intended to recognize 
that it may not be possible to quickly 
locate those customers and provide the 
required disclosure. One commenter 
criticized the proposed exception as 
overly broad, indicating that it could 
allow broker-dealers to evade disclosure 
by recommending a fund and then 
having customers mail in orders. That 
commenter suggested narrowing the 
exception to apply only when there has 
been ‘‘no prior contact’’ about the 
transaction at which disclosure could 
have occurred.

Request for comment. The 
Commission solicits comments on the 
appropriateness and necessity of the 
mailed order exception. Could the 
potential for abuse be minimized if the 
Commission were to make the exception 
unavailable to a broker-dealer that 
prompts a customer to use the mail, 
messenger delivery or similar third-
party delivery service to submit an 
order? Commenters are specifically 
invited to address: 

Q. Would a ‘‘no prior contact’’ 
standard for mailed-in orders, discussed 
above, be practical? 

Q. Should the exception require a 
broker-dealer relying on it to provide to 
its customers, every six months, 
standardized information about 
distribution costs and compensation 
associated with covered securities sold 
by the broker-dealer? 

Q. What are other possible ways to 
appropriately tailor the exception for 
orders received via the mail, messenger 

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10533Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 

52 For example, the concept of ‘‘share class’’ 
generally is not applicable to variable annuities. In 
addition, variable annuities impose charges for 
available insurance features, which were not 
addressed in the original proposal.

53 Like the other point of sale forms discussed 
above, the proposed new form in Attachment 7 
depicts how the required form would be filled in 
for a hypothetical variable annuity. The form is 
designed to disclose standardized information, plus 
transaction-specific information upon the 
customer’s request or as part of the broker-dealer’s 
standard practice. Similarly, the form would 
include quantified information about upfront sales 
fees and investment amount, deferred sales fees, 
and ongoing fees and expenses, as well as narrative 
information regarding potential conflicts of interest.

54 Broker-dealers would be required to disclose 
upfront sales fees on the proposed new form for 
variable annuities. Although front-end sales fees 
typically have not been charged on variable 
insurance products in recent years, we understand 
that a number of issuers are considering that pricing 
option. See Annuity Market News (October 2004).

55 Mortality and expense risk fees are imposed, in 
part, to compensate the insurance company for 
insurance risks it assumes under the contract.

56 For example, mortality and expense risk 
charges for some variable life insurance products 
are calculated based on underwriting characteristics 
of the contract owner or the insured.

57 A surrender charge may be imposed if an 
investor withdraws money from the annuity before 
a specified time period, often from seven to nine 
years.

58 The term ‘‘fixed account’’ refers to an account 
supported by an insurance company’s general 
account. Variable insurance product investors who 
direct funds to the fixed account are credited a 
predetermined interest rate, which is typically reset 
from time to time.

59 For example, while both products offer 
insurance features, variable life insurance typically 
has a more significant life insurance component, 
while a variable annuity typically may be utilized 
as a retirement investment vehicle. In addition, a 
variable life insurance purchase is typically subject 
to an insurance underwriting process, while a 
variable annuity purchase is not.

delivery or similar third-party delivery 
service? 

E. Special Issues Relating to Point of 
Sale Disclosure for Variable Insurance 
Products 

When we proposed rule 15c2–3, we 
drafted a single set of disclosure 
requirements to apply to variable 
insurance products as well as other 
covered securities. Commenters, 
however, stated that the proposed point 
of sale forms were not well suited to 
illustrating the costs associated with 
variable insurance products and did not 
reflect the products’ particular 
terminology, features, and pricing 
structure.52

To be effective, required point of sale 
disclosures for purchases of variable 
insurance products should take into 
account the unique characteristics of 
those products. This could be done 
through disclosure forms that are 
tailored to address the costs and 
conflicts particularly associated with 
variable annuities and variable life 
insurance products. Attachment 7 sets 
forth a point of sale disclosure form for 
variable annuities.53 While this form is 
based on the point of sale forms for 
mutual funds and 529 savings plan 
interests discussed above, it is tailored 
to reflect the unique features of variable 
annuities. For example, it would require 
disclosure of insurance-related costs 
associated with variable annuities, and 
would alert investors to the existence of 
the ‘‘free look’’ right available to them 
under state law.

Request for comment. The 
Commission solicits comment generally 
on the appropriateness and necessity of 
written point of sale disclosure for 
variable annuity and variable life 
insurance products. If the Commission 
were to adopt written point of sale 
disclosure requirements for variable 
annuities and variable life insurance 
products based on the attached form, 
would the form enhance investor 
understanding of those products? Does 
the attached form provide appropriate 
disclosure of the costs and conflicts 

associated with variable annuities? 54 
Does it provide appropriate disclosure 
for variable life insurance products? 
Commenters are also invited to suggest 
alternative models and submit 
alternative forms for both variable 
annuities and variable life insurance 
products. In addition, commenters 
specifically are invited to discuss the 
following:

Q. How could disclosure of 
comprehensive information about the 
costs of owning variable insurance 
products, such as mortality and expense 
risk fees, insurance costs, and fees 
associated with underlying funds, be 
accomplished? 55 Should each fee 
category be listed separately, or would 
disclosure of aggregate fees associated 
with a particular type of expense, such 
as insurance or fund costs, be 
preferable? Would disclosure of 
aggregate underlying fund fees, rather 
than discrete disclosure of each element 
of the fees’ composition, be sufficient?

Q. Should broker-dealers be required 
in point of sale disclosure to inform 
investors about how variable insurance 
product fees and expenses are charged? 
Should it explain that insurance and 
underlying fund costs may be deducted 
daily from contract value, while other 
charges may be imposed quarterly or 
annually? 

Q. Does the proposed disclosure of 
annual percentage ranges accommodate 
the different ways in which variable 
insurance product fees are calculated? If 
not, how might this be accomplished? 56

Q. Would point of sale disclosure of 
the maximum surrender charge 
percentage, and the general basis for its 
calculation, be sufficient to alert 
investors to these costs, particularly in 
light of the potential complexity of the 
surrender charge calculation? 57 Should 
broker-dealers be required in the point 
of sale disclosure to disclose the 
potential recapture of bonus credits? 
Commenters are invited to provide 
specific suggestions for making this 
disclosure.

Q. Should we require the inclusion in 
point of sale disclosure of costs 
associated with assets directed to the 
insurance company’s fixed account? 58 If 
so, would quantitative disclosure be 
necessary or would narrative disclosure 
suffice?

Q. Commenters also are invited to 
specifically address what terminology 
should be used in the point of sale 
disclosure for variable annuities. Should 
terms used in the point of sale 
disclosure be consistent with language 
commonly used in variable insurance 
product disclosure documents, 
including prospectuses, and sales 
materials? If not, commenters are 
invited to suggest ‘‘plain English’’ 
substitutes. 

Q. Should broker-dealers be required 
in point of sale disclosure to enumerate 
any non-recurring costs of owning 
variable insurance products, such as 
fees associated with excessive 
underlying fund transfers, or loan 
processing fees? 

Q. Because variable annuities 
typically do not impose both upfront 
and deferred sales fees, should the rule 
require broker-dealers to exclude the 
inapplicable section? 

Q. Should we require that the point of 
sale disclosure for variable insurance 
products describe the features and risks 
particular to these products, such as 
their insurance aspects, tax treatment 
and penalties for early withdrawal? 

Q. Although variable annuities and 
variable life insurance share many 
characteristics, the products differ in a 
number of ways.59 Comment is 
requested on how to tailor point of sale 
disclosure for variable life insurance. 
How should the insurance costs 
associated with variable life insurance 
be disclosed? Many broker-dealers use 
personalized illustrations to provide 
information to prospective variable life 
insurance purchasers. Personalized 
illustrations are tables that demonstrate 
how the cash value, cash surrender 
value, and death benefit under a policy 
change over time based on (i) assumed 
gross rates of return on the underlying 
mutual funds, and (ii) deduction of 
applicable fees and expenses. These 

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10534 Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 

60 For example, such criteria could require broker-
dealers to provide confirmations in a format readily 
communicated to investors, using layout and 
presentation that is reasonably calculated to draw 
attention to the information required under the 
confirmation disclosure rule, and using terminology 
that is intended to clearly convey required 
information to the investor. 61 See Siegel & Gale/Gelb Consulting Report.

illustrations are based on the investor’s 
particular circumstances, such as age, 
gender, risk classification, and premium 
payment pattern, and they reflect the 
effect of costs on death benefits and 
cash values. As an alternative to 
requiring point of sale cost disclosure 
for variable life insurance, should we 
instead mandate uniformity among 
personalized illustrations or otherwise 
regulate their content?

Q. Finally, commenters are invited to 
address any issues raised above 
regarding mutual funds and 529 savings 
plan interests that they believe are 
relevant to variable insurance product 
disclosure. 

III. Confirmation Proposal 
Commenters raised a number of issues 

about the proposed rule 15c2–2 
confirmation requirements. Some were 
similar to issues discussed above with 
regard to point of sale disclosure, while 
others were specific to confirmation 
disclosure. In light of those issues and 
further analysis of the proposal, we seek 
additional comment on the confirmation 
disclosure in a number of particular 
areas. 

A. Format of Confirmation Disclosure 
Proposed rule 15c2–2 would require 

broker-dealers to deliver confirmation 
disclosures to customers ‘‘in a manner 
consistent with Schedule 15C,’’ subject 
to an exception for a periodic reporting 
alternative. The proposed Schedule 15C 
confirmation disclosure form includes 
general transaction information (e.g., 
price and net asset value) plus 
purchase-specific information about 
distribution costs, broker-dealer 
compensation, differential 
compensation and breakpoint discounts, 
as well as extensive definitions and 
explanations. 

Several commenters stated that the 
proposed disclosure form was 
inadequate in that it would omit 
important information, would not 
permit adequate operational flexibility, 
and would not permit disclosure of 
additional information that may be 
needed to prevent the confirmation from 
being misleading. Commenters also 
highlighted the industry-wide cost of 
upgrading confirmation generation and 
delivery systems to produce two-page 
confirmations consistent with Schedule 
15C. Conversely, one commenter 
suggested that the proposal would not 
adequately ensure standardized and 
transparent disclosure. Our own 
investor outreach and AARP’s testing 
indicated that Schedule 15C was less 
effective than intended. 

Request for comment. If the 
Commission were to adopt revisions to 

the confirmation requirements in 
connection with transactions in covered 
securities, should it allow broker-
dealers to use their own format for 
presentation of information in the 
confirmation (in contrast to our 
proposal to mandate the format of point 
of sale disclosures) in order to avoid 
costs for upgrading existing 
confirmation generation and delivery 
systems? Would this approach still 
appropriately convey the necessary 
information to investors? Alternatively, 
should the Commission prescribe a 
format for confirmation disclosures, 
such as the format used to produce the 
proposed new confirmations set forth in 
Attachments 8–13? Attachments 8–10 
show possible confirmations for mutual 
fund purchases and Attachments 11–13 
show possible confirmations for 529 
savings plans. Commenters particularly 
are invited to discuss the following:

Q. Would it be appropriate to permit 
broker-dealers to deliver confirmations 
in varying formats so long as required 
information is disclosed? If no specific 
format is required, should the 
Commission require broker-dealers to 
follow specific disclosure criteria? 60

Q. If a specific confirmation 
disclosure form is not prescribed, 
should broker-dealers be precluded 
from using different terminology (e.g., 
terms such as ‘‘sales load’’ or ‘‘12b–1 
fee’’) on confirmations than on point of 
sale disclosure forms? 

Q. Will investors be more likely to be 
confused or unable to elicit relevant 
information if the format is not specified 
by the Commission? Commenters are 
also invited to estimate the cost savings 
that might be realized if broker-dealers 
were not required to deliver 
confirmations in a particular format. 

B. Confirmation Disclosure of 
Comprehensive Ownership Cost 
Information 

Proposed rule 15c2–2 would require 
confirmation disclosure of the potential 
amount of any asset-based sales charges 
and service fees that would be incurred 
by the issuer of the covered security in 
connection with the shares or units 
purchased. That was consistent with the 
rule’s proposed focus on distribution 
costs rather than total ownership costs. 
As with point of sale disclosure, many 
investors favored confirmation 
disclosure of comprehensive 

information about ownership costs, 
beyond distribution costs, including 
disclosure of non-distribution costs 
such as fund management fees and other 
expenses.61

Request for comment. Should the 
Commission require confirmations to 
include information about all ongoing 
costs of owning covered securities, such 
as ‘‘management fees’’ and ‘‘other 
expenses’’, and not merely distribution 
costs? Commenters also may wish to 
address the forms in Attachments 8–13, 
which illustrate how such fees could be 
set forth on confirmations. Commenters 
particularly are invited to discuss: 

Q. Would comprehensive 
confirmation disclosure of all the asset-
based distribution charges, management 
fees and other expenses that constitute 
the annual asset-based costs of owning 
covered securities be particularly 
appropriate in light of the possibility 
that point of sale disclosures could be 
given orally, or that no point of sale 
disclosure could be given at all if a 
subsequent purchase exception is 
adopted? Would disclosure in a 
specified format and/or using specific 
terminology be particularly appropriate 
for the same reasons? 

Q. Should information about 
comprehensive asset-based fees and 
costs be disclosed separately by category 
and in the aggregate, or only in the 
aggregate? Should the fees be expressed 
as a percentage of asset value and in 
dollars? 

Q. In the case of two-tiered products, 
such as 529 savings plan interests and 
variable insurance products, should the 
disclosure requirement encompass fees 
associated with underlying securities as 
well as fees incurred by the issuers of 
covered securities? If disclosing the 
ownership fees associated with each 
fund underlying an insurance separate 
account or other covered security would 
not be useful, should confirmations 
instead set forth information about the 
fees associated with the underlying 
funds that are involved in a particular 
transaction, or about the range of 
possible fees? In such circumstances, 
should percentage disclosure be based 
on either the net asset value of the 
underlying securities purchased using 
money invested in the covered security 
or on the asset value of the covered 
security, itself? 

Q. What operational issues would be 
related to the inclusion of 
comprehensive disclosure of the asset-
based charges on transaction 
confirmations? Commenters are invited 
to estimate the cost of including this 
information. 

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10535Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 

C. Confirmation Disclosure of Broker-
Dealer Compensation 

As described in the Proposing 
Release, proposed rule 15c2–2 would 
have required confirmation disclosure 
of the amount of dealer concessions 
earned by the broker-dealer in 
connection with the transaction, as well 
as estimates about the amounts of 
revenue sharing and portfolio brokerage 
commissions that a broker-dealer or its 
affiliates receives from persons within 
the fund complex. It also would require 
‘‘yes’’ or ‘‘no’’ disclosure about whether 
the broker-dealer engaged in certain 
differential compensation practices. 

While many investors supported the 
concept of confirmation disclosure 
about broker-dealer compensation, the 
results of our in-depth investor 
interviews and focus group testing 
suggested that investors are more 
interested in seeing the total amounts 
they pay for investments in covered 
securities than in seeing the broker-
dealer’s precise compensation. Some 
securities industry commenters 
discussed the difficulty of placing 
quantitative information about 
compensation on confirmations, and 
emphasized the cost required to convey 
compensation information from selling 
brokers to firms that issue confirmations 
or to other entities that prepare 
confirmations on behalf of selling broker 
(as well as the fact that investors 
ultimately may be expected to bear the 
bulk of those costs). A number of 
commenters stated that confirmation 
disclosure of broker-dealer 
compensation and conflicts of interest 
would be duplicative of the point of sale 
disclosure, and that disclosure of 
compensation and conflicts could be 
done more effectively through broker-
dealer Internet web sites. Some 
securities industry commenters also 
stated that the proposed method of 
quantifying revenue sharing payments 
would be misleading, and that the 
disclosure of differential compensation 
was unclear and not well tailored to 
those payments. 

As discussed in more detail below, we 
are asking for comments about the 
possible use of Internet-based disclosure 
as a supplement to, but not a 
replacement for, point of sale and 
confirmation disclosure. Under such an 
alternative, broker-dealers would be 
permitted to show the quantified details 
of their compensation practices to 
interested investors via a web site, while 
continuing to disclose the existence of 
the conflict of interest arising from such 
practices on point of sale and 
confirmation disclosure documents. 

Request for comment. The 
Commission solicits comment on all 
aspects of the proposed disclosure of 
broker-dealer compensation. Should the 
Commission require broker-dealers to 
show quantified details of their 
compensation practices via a web site, 
and disclose only the existence of the 
conflict of interest arising from such 
practices on point of sale and 
confirmation disclosure documents? 
Commenters specifically are invited to 
discuss the following: 

Q. Would supplementary Internet-
based disclosure of the type discussed 
below serve as an appropriate and 
useful alternative to the confirmation 
disclosure proposed in the Proposing 
Release about how much and how 
broker-dealers and their personnel are 
compensated, particularly in light of 
concerns about ‘‘information overload’’? 

Q. If confirmation disclosure about 
compensation is appropriate to assist 
investors, should information about 
revenue sharing payments be quantified 
on confirmations? If so, how could that 
accurately be done? Should we require, 
in addition to amount, the sources of 
revenue sharing payments received by 
the broker-dealer on the confirmation 
(e.g., ‘‘Last year, fund manager AAA or 
its affiliates paid us $XX to promote the 
sale of their funds’’).

Q. What are the potential cost savings 
associated with requiring disclosure of 
the existence of the conflict of interest 
arising from broker compensation 
practices on the confirmation and point 
of sale documents and more detailed, 
quantified information about those 
practices on the Internet? 

Q. If a transaction confirmation is 
issued by a clearing broker-dealer, but 
the sale also was effected by an 
introducing broker-dealer, should 
confirmation disclosure identify 
conflicts of interest separately for each 
broker-dealer? 

D. Confirmations for Transactions 
Involving 529 Savings Plan Interests 

As described in the Proposing 
Release, proposed rule 15c2–2 would 
require confirmation disclosure of the 
net asset value of the covered security, 
and, if different, the public offering 
price. One commenter noted that in the 
context of 529 savings plan interests 
there may not be an issuer-calculated 
net asset value available, and suggested 
that broker-dealers, issuers and other 
industry participants will need to work 
toward making net asset value, or 
information necessary to calculate net 
asset value, available on a daily basis. 

Because 529 savings plan interests are 
two-tiered products, and their 
underlying portfolios may be purchased 

at a different time than the investment 
in some plans, the proposed rule may 
require multiple confirmations. 

Request for comment. Commenters 
are invited to discuss generally 
confirmation disclosure in connection 
with transactions in 529 savings plan 
interests, as well as the following issues: 

Q. In the event that a 529 savings plan 
issuer does not make information about 
net asset value and price available daily, 
how should a broker-dealer effecting a 
transaction in an interest in that plan 
report the net asset value and public 
offering price on the confirmation? 
Should the initial confirmation report 
that amount as ‘‘unknown’’? Should the 
broker-dealer be required to 
subsequently send the customer 
complete information as soon as it 
becomes available, through a 
supplementary confirmation? Are there 
other mechanisms that the Commission 
should permit broker-dealers to use to 
provide the required disclosure? 

Q. To what extent do existing 529 
savings plans hold investor money for 
one or more days before placing that 
investment into an underlying security? 
In such circumstances, should broker-
dealers be required to provide separate 
confirmations (the first at the time of the 
customer’s investment, and the second 
when the state issuer places that money 
into the underlying security)? In these 
circumstances, would the broker-dealer 
be sufficiently apprised of the state’s 
practices to enable it to comply? For 
each such confirmation, what price or 
net asset value should be conveyed? 
Commenters are invited to suggest 
alternatives to this approach that would 
be consistent with investor protection. 

E. Confirmations for Transactions 
Involving Variable Insurance Products 

Attachment 14 sets forth a 
confirmation related to a transaction in 
a variable annuity. This confirmation 
form seeks to reflect the special 
characteristics and terminology 
associated with those products. For 
example, the form uses the term ‘‘unit 
value’’ rather than ‘‘net asset value,’’ 
and sets forth the unit value and 
number of units for each subaccount 
involved in a transaction. When 
appropriate, as shown on Attachment 
14, the confirmation would set forth 
dollar amounts for each subaccount 
when accumulation units are not used. 

Request for comment. The 
Commission solicits comment on all 
aspects of variable insurance product 
confirmation disclosure. If the 
Commission were to adopt confirmation 
disclosure requirements for variable 
insurance products similar to those on 
this form, would investors be 

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10536 Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 

62 For example, the Commission explains terms in 
its publication ‘‘Variable Annuities: What You 
Should Know’’ (available at http://www.sec.gov/
investor/pubs/varannty.htm). Would these terms be 
appropriate to use in the context of variable life 
products?

63 However, in part II.B above we requested 
comment about whether it would be appropriate to 
permit broker-dealers to deliver point of sale 
disclosures over the Internet or by e-mail to those 
customers who have opted to receive such 
disclosures electronically.

64 See Siegel & Gale/Gelb Consulting Report.
65 As set forth in the Proposing Release, rule 

15c2–2 would have required broker-dealers to 
quantify revenue sharing and portfolio brokerage 
commissions on confirmations using a pro rata 
estimate approach that considered: (i) the amount 
of the customer’s transaction, (ii) the broker-dealer’s 
prior receipt of compensation from the fund 
complex, and (iii) the broker-dealer’s prior 
distribution of shares on behalf of the fund 
complex. Some securities industry commenters 
objected to the proposed quantification of revenue 
sharing associated with particular transactions. 

Securities industry commenters also emphasized 
that providing transaction-specific quantified 
information about compensation could be 
particularly costly on confirmations, as that could 
require selling broker-dealers to develop linkages to 
convey relevant data to clearing firms or others that 
issue confirmations.

66 For example, an investor should be able to see 
not only what is the maximum possible fee a 
broker-dealer may receive, but also what a broker-
dealer actually has received or can expect to receive 
for selling a particular covered security. That is 
because a customer would be better able to 
scrutinize a broker-dealer’s sales efforts if, for 
example, the customer can see that one potential 
investment is associated with a 0.25 percent 
transaction-based fee, but another is associated with 
a 0.15 percent transaction-based fee.

67 As noted in the Proposing Release, in 2003 
NASD requested comment on proposed rules to 
require member firms to disclose certain 
information about revenue sharing and differential 
compensation to customers at account opening or, 
if no account is established, at the time the 
customer first purchases shares of an investment 

adequately informed about transactions 
in those products? Is the confirmation in 
Attachment 14 appropriate for 
transactions in variable life insurance 
products? Commenters specifically are 
invited to discuss: 

Q. Would the confirmation form 
appropriately inform customers about 
the particulars of the investment, 
including information about the value 
and price of the investment (including 
amounts allocated to particular 
subaccounts and the insurance company 
fixed account) and the costs associated 
with owning underlying securities? 

Q. What would be the implementation 
and cost issues associated with applying 
such confirmation requirements to 
variable insurance products? 

Q. How should we tailor the 
confirmation disclosure requirement to 
variable life insurance products? How 
should the insurance costs associated 
with variable life insurance be 
disclosed? Should the forms include 
any explanation or definitions of the 
insurance terms that are used, such as 
‘‘mortality and expense risk fees,’’ ‘‘cost 
of insurance,’’ ‘‘death benefit,’’ and 
‘‘fixed account’’? Are there other 
insurance terms which should be used 
on the disclosures? Are there terms for 
which explanatory definitions would be 
useful to investors? 62 If so, what 
definitions should be used? 
Alternatively, would including 
definitions of insurance terms on the 
forms lead to ‘‘information overload’’ or 
otherwise not be useful to investors?

IV. Supplemental Internet-based 
Disclosure of Detailed Information 
About Revenue Sharing Payments and 
Other Broker Compensation Practices 

Some commenters recommended 
permitting the proposed point-of-sale 
disclosures to be made on a broker-
dealers’ web site. We do not believe that 
Internet-based disclosure would be an 
adequate substitute for point of sale 
disclosure and improved confirmation 
disclosure.63 We also do not believe that 
requiring investors to use the Internet as 
the sole means to obtain key 
information about their own costs of 
owning covered securities and about 
special compensation arrangements that 
lead to conflicts of interest will 

adequately serve investors’ interests, or 
adequately address broker-dealers’ 
obligations.

At the same time, a number of factors 
suggest that Internet-based disclosure 
could supplement point of sale and 
confirmation disclosures, and could 
adequately serve as a primary means of 
providing some types of information to 
customers. As noted above, investors 
generally expressed more interest in 
information about the costs of owning 
covered securities than about broker-
dealer compensation.64 Moreover, point 
of sale and confirmation disclosure of 
quantified compensation information 
also may lead to ‘‘information 
overload.’’ This may distract investor 
attention from information about 
distribution costs. Also, it would be 
difficult to accurately depict some 
compensation arrangements on simple 
disclosure documents given that any 
such approach may inaccurately cause 
investors to think their particular 
purchase would lead their broker-dealer 
to receive precisely the disclosed 
amount of revenue sharing, when in 
reality there would be no such causal 
link.65

Internet-based disclosure that 
provides customers with quantified 
information about broker-dealer 
compensation arrangements (not merely 
generic descriptive information) and 
identifies the sources of payments made 
under those arrangements could help 
customers evaluate how those 
arrangements can impact broker-dealers’ 
recommendations and presentation of 
investment options. Necessarily, 
Internet-based disclosure must be 
supplemented with other means for 
investors to obtain the disclosure if they 
have no access to the Internet or desire 
to receive the disclosure by other 
means. Accordingly, we are considering 
requiring broker-dealers to maintain a 
toll-free telephone number which 
investors could call to request that a 

copy of the Internet-based disclosure be 
mailed to them. 

Some broker-dealers currently 
disclose on their web sites quantified 
information about potential amounts of 
revenue sharing or other payments from 
fund families, including information 
about payments the broker-dealers 
receives from mutual funds for 
recordkeeping activities. While those 
web sites that have quantitative 
information represent steps in the right 
direction, customers should be able to 
see more information about how their 
sales personnel are compensated.66 
Moreover, customers should have ready 
access to quantified information rather 
than having to search for the 
information in the midst of extensive 
explanations. Customers also should be 
able to see compensation information 
that is labeled clearly and consistently, 
and not referred to by vague or generic 
terms such as ‘‘administrative service’’ 
or ‘‘support fees’’ or ‘‘expense 
reimbursement.’’

If the Commission were to require 
Internet-based disclosure of 
compensation arrangements—as a 
supplement to proposed disclosure of 
the existence of the conflict of interest 
arising from such practices on point of 
sale and confirmation disclosure 
documents—such Internet-based 
disclosure could include information 
about: 

• Revenue sharing payments; 
• Certain other payments out of issuer 

assets that may provide incentives for 
broker-dealers to distribute covered 
securities; 

• Special compensation-related 
conditions that broker-dealers place on 
fund distribution; 

• Broker compensation; and 
• Brokers’ differential compensation 

practices. 
Attachment 15 illustrates how such 

Internet-based disclosure could appear 
in practice, if we were to adopt a rule 
requiring Internet-based disclosure of 
broker-dealer compensation 
arrangements.67

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10537Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 

company. The proposal also would require broker-
dealers to use the Internet or a toll-free telephone 
number to provide updated information, or else to 
send updated information to customers semi-
annually. Among other features, that NASD 
proposal would require broker-dealers to rank fund 
families that make revenue sharing payments in 
descending order of amounts paid to the broker-
dealer (without having to identify the actual 
amount of compensation received). It also would 
require broker-dealers to state whether they pay 
differential compensation in the form of heightened 
payout ratios, and to identify the investment 
companies favored by those arrangements. See 
NASD Notice to Members 03–54 (Sept. 2003). 

The approach to Internet-based disclosure we are 
considering here would focus on quantifying 
compensation resulting from a customer’s purchase 
of a specific covered security. Thus, the approach 
described here would appear to complement the 
approach described by NASD (which has yet to be 
submitted as a proposed rule change).

68 Those payments provide sales incentives that 
create conflicts between broker-dealers’ financial 
interests and their agency duties to customers. 
Revenue sharing payments may lead a broker-dealer 
to use ‘‘preferred lists’’ that explicitly favor the 
distribution of certain funds. Revenue sharing 
payments also may lead to favoritism that is less 
explicit but just as real, such as through broker-
dealer practices allowing funds that make revenue 
sharing payments to have special access to broker-
dealer sales personnel, and through other incentives 
or instructions that a broker-dealer may provide to 
managers or salespersons. See, e.g., In the matter of 
Edward D. Jones & Co., Securities Act Release No. 
8520 (Dec. 22, 2004) (broker-dealer violated 
antifraud provisions of Securities Act and Exchange 
Act by failing to disclose conflicts of interest arising 
from receipt of revenue sharing, directed brokerage 
payments and other payments from ‘‘preferred’’ 
families that were exclusively promoted by broker-
dealer); In the Matter of Morgan Stanley DW Inc., 
Securities Act Release No. 8339 (Nov. 17, 2003) 
(broker-dealer violated antifraud provisions of 
Securities Act by failing to disclose special 
promotion of funds from families that paid revenue 
sharing and portfolio brokerage). 

Revenue sharing payments also can play a role in 
compensating broker-dealers that distribute no-load 
funds through mutual fund ‘‘supermarkets.’’ Those 
broker-dealers may charge commissions for some 
fund purchases, but provide commission-free 
purchases of funds from fund complexes that make 
revenue sharing payments. Funds that make 

revenue sharing payments also may be placed on 
lists of mutual funds that a broker-dealer suggests 
or otherwise highlights to customers.

69 In asking above about revenue sharing 
disclosure requirements at the point of sale, we 
discuss potential definitions and exclusions that 
may appropriately focus the disclosure requirement 
in that way.

70 Payments linked to a broker-dealer’s recent 
sales of shares issued by a fund complex give the 
broker-dealer an incentive to sell more shares of 
that fund complex. Payments linked to the asset-
based fees that the adviser earns in connection with 
shares of a fund complex held by broker-dealer 
customers give the broker-dealer an incentive to sell 
more shares of, and keep its customers invested in, 
that fund complex. Miscellaneous payments such as 
sponsorships of broker-dealer training programs 
further promote the sale of shares on behalf of the 
fund complex.

71 Retrospective information would have the 
benefit of being comprehensive, while prospective 
information would have the benefit of being more 
timely. Such prospective information alone may be 
incomplete given that broker-dealers and fund 
families may adjust revenue sharing payments to 
reflect prior sales efforts, and due to the informal 
nature of some of these arrangements. There may 
be special disclosure challenges because certain 
promotional payment arrangements are not reduced 
to written agreements. Under such an approach, 
broker-dealers would have to fairly and accurately 
depict their understandings, together with any 
ambiguities in compensation that may exist. 
Investors would then have to weigh the significance 
of those ambiguities.

Finally, for those customers who have 
no access to the Internet or who prefer 
other means of receiving the proposed 
Internet-based disclosures, we would 
also require broker-dealers to maintain 
toll-free telephone numbers by which 
investors can request a mailed copy of 
the disclosure information. As 
discussed in previous sections, the toll-
free number would be disclosed on 
point of sale disclosures and on 
transaction confirmations. 

A. Detailed Disclosure of Revenue 
Sharing Payments 

A critically important component of 
any Internet-based disclosure of broker-
dealer compensation arrangements 
would be detailed disclosures of 
revenue sharing payments that selling 
broker-dealers or their affiliates may 
receive for distributing fund shares from 
a fund’s investment adviser or others.68 

As with qualitative point of sale 
disclosure, we are proposing to require 
quantitative Internet-based disclosure of 
revenue sharing payments, regardless of 
how they are labeled. Even if a 
particular payment from a fund complex 
fairly can be depicted as offsetting 
broker-dealer expenses connected with 
fund distribution, the payments still can 
constitute direct financial incentives for 
a broker-dealer to favor that fund 
complex over fund complexes that do 
not make such payments. The proposed 
disclosure requirement would be 
targeted toward payments that are most 
likely to impact the broker-dealer’s 
distribution of the covered security, by 
excluding payments from certain 
sources and certain payments to 
affiliates.69 On the Internet, the 
compensation that is required to be 
disclosed could be broken down by 
payment stream (with separate 
disclosure of transaction-based 
payments), asset-based payments, and 
miscellaneous payments.70 The source 
of payments would also be disclosed.

Attachment 15 illustrates how those 
separate types of payment streams could 
be disclosed under such a requirement. 
For example, disclosure of transaction-
based revenue sharing payments that 
the broker-dealer or associated person 
receives from certain affiliates of a fund 
would be required to be expressed in 
dollars received per $1,000 of covered 
securities sold, reflecting benchmarks 
that may lead to stepped-up 
compensation when the broker-dealer 
sells more shares of a particular mutual 
fund or fund family. Similarly, 
disclosure of asset-based revenue 
sharing payments would be required to 
be expressed in dollars received per 
$1,000 dollars sold, again reflecting 
benchmarks that may impact the 
compensation. Such disclosures would 
encompass revenue sharing payments 
received, whether by a broker-dealer or 
by an affiliate, in connection with 
securities that underlie a covered 

security, including revenue sharing 
payments received from underlying 
funds in connection with sales of 529 
savings plans and variable insurance 
products. 

This type of approach to disclosure 
also would require broker-dealers to 
summarize other revenue sharing 
payments that do not reflect transaction-
based, and asset-based, income streams. 
Such amounts would be depicted 
retrospectively in terms of total dollars 
received in the prior fiscal year, along 
with a statement of the value of the 
covered securities that the broker-dealer 
or associated person sold on behalf of 
that group of issuers (or ‘‘related 
issuers’’) during that period. Such 
amounts also would be depicted 
prospectively as a reasonable estimate of 
such revenue sharing payments 
expected to be received in the current 
fiscal year based on present 
arrangements or understandings, along 
with a statement of the amount of 
revenue sharing payments received in 
the prior fiscal quarter.71

Request for comment. Commenters 
are invited to discuss the possible 
contours of an Internet-based disclosure 
requirement for revenue sharing 
payments as an alternative to disclosure 
in point of sale or confirmation 
documents, including the adequacy of 
the disclosure set forth in Attachment 
15. Commenters particularly are invited 
to discuss the following: 

Q. Would such disclosure adequately 
set forth information about the various 
possible payment streams? Would more 
particularized disclosure better alert 
customers to the resulting conflicts of 
interest? If so, how should we tailor the 
required disclosure to do so? Should we 
require broker-dealers to state the total 
amounts of revenue sharing payments 
received by source? Should the 
Commission instead require disclosure 
of the source and amounts of payments 
at the point of sale or on transaction 
confirmations? 

Q. How should customers be 
informed about revenue sharing 
payments and other payments that are 
not subject to formal agreements, but 

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10538 Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 

72 Other payments out of issuer assets would not 
appear to pose a significant influence on broker-
dealer distribution. For example, payments from 
issuers to compensate broker-dealers for mailing 
certain documents (other than the prospectus) to 
customers are subject to cost limits imposed by 
NASD rules, and as such may not be expected to 
provide compensation for distribution services. See 
NASD rule IM–2260 (approved rates of 
reimbursement). 

Also, as noted above, payments from funds for 
brokerage services are barred from being used to 
finance distribution. In September 2004, we 
amended rule 12b–1 under the Investment 
Company Act to prohibit the use of fund brokerage 
to compensate broker-dealers for selling fund 
shares. See Investment Company Act Release No. 
26591 (Sept. 2, 2004), 69 FR 54728 (Sept. 9, 2004).

instead take the form of ad hoc payment 
arrangements? 

Q. How should customers be 
informed about prospective revenue 
sharing payments that a broker-dealer 
expects to receive in the future but that 
have not been paid or accrued? 

Q. How should investors be informed 
of payments received by the insurance 
company issuing a variable product 
from the investment advisers of 
underlying funds? What types of 
conflicts do these payments raise? 

B. Disclosure of Certain Payments Out 
of Issuer Assets 

Internet-based disclosure also might 
be appropriate for certain payments that 
broker-dealers receive out of fund 
assets. These payments may not pose 
the same conflicts of interest as certain 
payments received from investment 
advisers and other non-issuers but they 
may provide incentives for broker-
dealers to distribute covered securities. 
For example, payments out of issuer 
assets may represent compensation for 
the broker-dealer’s own recordkeeping 
activities. Even when payments out of 
fund assets could be justified as bona 
fide compensation for non-distribution 
services, they may constitute a direct 
financial incentive for a broker-dealer to 
favor fund complexes that make such 
payments.72

Attachment 15 illustrates how such 
payments might be depicted in a way 
that would allow customers to evaluate 
the significance of the incentives they 
provide. As shown in this illustration, 
the broker-dealer would be required to 
disclose a summary of all payments it 
receives from the issuer of the covered 
security (or from the issuer of an 
underlying covered security in the case 
of two-tiered products). Such amounts 
would be disclosed retrospectively (as a 
statement of the total dollars of such 
payments that the broker-dealer 
received from such issuer in the prior 
fiscal year) and prospectively (as a 
reasonable estimate of such payments 
that the broker-dealer can expect to 

receive from such issuer in the current 
fiscal year, based on present 
arrangements or understandings). 

Request for comment. Would 
requiring a broker-dealer to disclose 
certain payments received from issuers 
discussed above be useful to investors? 
Commenters particularly are invited to 
discuss the following: 

Q. Would disclosure of amounts 
received from issuers, with specific 
exclusions for brokerage commissions, 
mailing fees and other payments 
disclosed elsewhere, appropriately 
provide customers with information 
about issuer payments that can pose 
conflicts of interest? Should such a 
disclosure requirement be more specific, 
perhaps by focusing on payments for 
transfer agent-related activities or other 
recordkeeping-related activities? 

Q. Should such a disclosure 
requirement encompass payments 
received by certain affiliates of broker-
dealers? To what extent do broker-
dealer affiliates receive such payments 
in connection with securities 
distributed by broker-dealers? How 
could required disclosure of those issuer 
payments be implemented for payments 
received by associated persons of a 
broker-dealer? 

Q. Are there other payments or 
economic benefits that broker-dealers 
receive from issuers or their affiliates 
that we should require broker-dealers to 
disclose? 

Q. Broker-dealers particularly are 
invited to discuss how the amounts they 
receive via such payments compare to 
the costs they would incur to provide 
such services (particularly costs they 
would not otherwise incur as part of 
their normal course of business). 

C. Disclosure of Other Distribution-
Related Factors That Influence Broker-
Dealer Sales of Covered Securities 

Internet-based disclosure also may be 
appropriate for informing customers 
about factors in addition to those 
disclosed at point of sale that influence 
broker-dealer sales of covered securities. 
For example, as noted above, some 
broker-dealers give fund complexes that 
make revenue sharing payments special 
marketing access to broker-dealer sales 
personnel that is not available to other 
fund complexes. Some broker-dealers 
may have a practice of restricting 
recommendations of securities to the 
funds of complexes that make revenue 
sharing payments, or of restricting 
placement of securities on a highlighted 
list to only those funds of complexes 
that make revenue sharing payments. 
We understand that some broker-dealers 
may require that a fund complex pay 
asset-based distribution fees under a 

rule 12b–1 plan with regard to other 
mutual funds of that complex, including 
mutual funds that are closed to new 
investors, as a condition of selling one 
or more other funds of that fund 
complex. 

Additional information about these 
practices may help customers evaluate 
broker-dealer sales incentives. 
Attachment 15 illustrates the types of 
disclosure that could result if broker-
dealers were required to use the Internet 
to set forth any explicit or implicit 
arrangement by which they condition 
any distribution-related benefit to a 
fund or fund complex upon the receipt 
of certain compensation or other 
economic benefits. In fulfilling their 
disclosure obligations under such a 
provision, a broker-dealer would need 
to comprehensively inform customers 
about all arrangements by which 
distribution is conditioned on special 
compensation or benefits. Under this 
form, required disclosures would 
include, if applicable, statements: (i) 
That the broker-dealer does not sell no-
load funds; (ii) that the broker-dealer 
provides preferred salesperson access to 
fund complexes or other issuers that 
make revenue sharing payments; (iii) 
that the broker-dealer only distributes 
covered securities whose issuer pays a 
certain threshold of recordkeeping-
related fees; (iv) that all covered 
securities on the broker-dealer’s 
‘‘preferred’’ or ‘‘select’’ list of securities 
make revenue sharing payments to the 
broker-dealer; or (v) that the broker-
dealer conditions distribution of any 
covered security of the fund complex or 
other issuer to the receipt of rule 12b-
1 fees in connection with other covered 
securities of that fund complex or other 
issuer. 

Request for comment. Should the 
Commission adopt a requirement for 
broker-dealers to disclose additional 
distribution-related conditions? If 
adopted, should this disclosure be on 
the Internet? Would such disclosures 
assist customers in understanding 
broker-dealer financial incentives? 

Q. To what extent do broker-dealers 
currently have a practice of 
conditioning recommendations and 
placement on preferred lists to fund 
families that make revenue sharing 
payments? To what extent do broker-
dealers currently condition distribution 
of funds on receipt of rule 12b-1 fees 
from all funds in the complex? 

Q. Should any rules explicitly 
identify certain arrangements that 
would have to be disclosed under this 
type of provision, such as those in 
statements (i) through (v) above? If so, 
which arrangements should be 
identified with particularity in a rule? 

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10539Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 

73 The amounts earned by an underwriter may be 
difficult to quantify in a fee schedule because an 
underwriter may retain the residual between sales 
fees paid by investors and dealer concessions paid 
to selling brokers, rather than a preset amount. That 

particularly would be an issue in the case of share 
classes with a deferred sales load.

74 Disclosure of the source of clearing firm 
compensation would appear appropriate because 
some clearing broker-dealers enter into promotional 
arrangements through which clearing fees are paid 
by a fund complex rather than by selling broker-
dealers.

75 That type of compensation incentive was not 
proposed to be captured at the point of sale due to 
the need to keep point of sale disclosure simple and 
the risk that such disclosure either would 
invariably lead to a ‘‘yes’’ answer or else would be 
too unwieldy at the point of sale.

76 A broker-dealer might determine that a 
particular set of funds are ‘‘comparable’’ if they fall 
within the same grouping or categorizations 
provided by major vendors of mutual fund data. 
Such groupings may focus on particular investment 
styles as ‘‘mid cap value’’ or industry sector funds, 
as well as distinguishing between index funds and 
actively managed funds. Such a type of highly 
focused categorization appears appropriate for 
disclosure of differential compensation, because 
that focus would appear consistent with differences 
in broker-dealer compensation. Such a type of 
‘‘comparable’’ categorization standard is intended 
to avoid comparisons that would invariably lead to 
‘‘yes’’ answers, such as comparisons of load funds 
with no-load funds. Broker-dealers would have to 
determine whether or not the compensation 
associated with a particular mutual fund is above 
the average compensation associated with the 
applicable category.

Should such conditions also have to be 
disclosed at the point of sale? 

D. Disclosure of Compensation That 
Broker-Dealers Receive in Connection 
With Distributing Covered Securities 

An Internet-based disclosure 
requirement could encompass 
disclosure of the concessions that 
broker-dealers earn in connection with 
a transaction, and annual asset-based 
payments that broker-dealers would 
expect to receive for selling the covered 
security or for providing services to the 
customer’s account (including payments 
denoted as compensation for providing 
shareholder services, as well as other 
distribution-related compensation). 
Such disclosures would include 
payments in connection with 
underlying securities purchased via 
two-tiered products, such as 529 savings 
plans and variable insurance products. 
As depicted in Attachment 15, such 
payments would be quantified based on 
model purchases to allow investors to 
see how much of a dealer concession 
the broker-dealer would receive in 
connection with various transaction 
sizes or asset amounts. 

Request for comment. Should the 
Commission adopt an Internet-based 
disclosure requirement of broker-dealer 
compensation arrangements, including 
dealer concessions and annual asset-
based payments that broker-dealers 
would expect to receive for selling the 
covered security or for providing 
services to the customer’s account? 
Commenters specifically are invited to 
discuss whether the Commission should 
require such Internet-based disclosure 
as a supplement to point of sale and 
confirmation disclosure. In addition, 
commenters are requested to discuss the 
following: 

Q. Would disclosure about dealer 
concessions and annual asset-based fees 
earned by each broker-dealer effecting a 
transaction appropriately encompass all 
standard types of compensation? 

Q. How should disclosure of such 
amounts be quantified? Would requiring 
thresholds of $1,000, $50,000 and 
$100,000 be appropriate? Should 
disclosure of compensation related to 
front-end sales fees reflect a model 
purchase of $1,000 and any breakpoint 
threshold?

Q. How should such disclosure 
requirements be applied to broker-
dealer underwriters for mutual funds 
and other covered securities? 73 Would 

investors benefit from disclosure of 
underwriter compensation in the same 
way they would benefit from disclosure 
of the compensation received by selling 
broker-dealers? Would that benefit 
depend on the types of compensation 
received or an underwriter’s direct 
versus indirect interaction with a 
customer, such as instances in which an 
underwriter is also broker of record for 
the customer (so-called ‘‘orphan 
accounts’’)?

Q. How should such disclosure 
requirements be applied to broker-
dealers that clear purchase transactions 
on behalf of other broker-dealers? 
Would it be adequate for a clearing firm 
to satisfy its disclosure requirements by 
setting forth its fee schedule for clearing 
covered securities, and disclosing the 
source of its compensation (e.g., selling 
broker-dealer or mutual fund 
complex)? 74 How would customers be 
informed about the conflicts of interest 
posed by promotional arrangements 
between clearing broker-dealers and 
fund complexes, such as arrangements 
by which a fund complex agrees to pay 
ticket charges imposed by a clearing 
broker-dealer, so the charges are not 
passed on to selling broker-dealers and 
their sales personnel?

E. Disclosure of Differential 
Compensation 

The Internet, supplemented with 
investors’ ability to call toll-free 
numbers to request mailed copies of 
required disclosures made on the 
Internet, also may provide a useful 
medium for broker-dealers to provide 
customers with quantitative information 
about differential compensation 
practices. As noted in the Proposing 
Release, conflicts of interest may result 
from practices by which an associated 
person is paid a heightened percentage 
of the broker-dealer’s compensation 
when he or she sells a fund that is 
favored by the broker-dealer (such as a 
fund that is affiliated with the broker-
dealer or that makes revenue sharing 
payments to the broker-dealer), and 
practices by which an associated person 
earns more for selling ‘‘class B’’ shares 
with deferred sales fees than other share 
classes because of the higher sales 
compensation received by the broker-
dealer firm for selling class B shares. 
Point of sale disclosure of differential 
compensation practices as proposed, 

however, would not cover situations in 
which an associated person has a 
financial incentive to sell securities that 
pay a relatively high dealer concession 
or commission to the broker-dealer, 
even though that would translate into a 
relatively high payment to the 
associated person.75

Requiring Internet-based disclosure of 
a broker-dealer’s compensation 
practices, however, may provide an 
appropriate forum for disclosure of 
additional compensation incentives to 
sales personnel and other associated 
persons. Attachment 15 depicts how, 
under such a requirement, a broker-
dealer could use the Internet to 
illustrate the compensation incentives 
associated with relatively high dealer 
concessions, compared to comparable 
covered securities.76 Under such an 
approach, multiple covered securities 
may be ‘‘comparable’’ if they are not 
materially different with respect to their 
investment objectives and goals, its 
principal investment strategies, and the 
principal risks that would result from 
investing in such a covered security. 
That disclosure also illustrates how the 
Internet could be used to illustrate and 
quantify differential compensation in 
connection with the sale of a class of 
covered securities that charges a 
deferred sales fee, and information 
about the payment of any other form of 
differential compensation to any 
associated persons in connection with 
the purchase of the covered security.

Request for comment. Should the 
Commission require broker-dealers to 
make enhanced disclosure of 
differential compensation on the 
Internet? Should the Commission also 
require broker-dealers to permit 
customers the ability to request the 
Internet-based disclosures be mailed to 
them by calling a toll-free telephone 

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10540 Federal Register / Vol. 70, No. 42 / Friday, March 4, 2005 / Proposed Rules 

77 An analogous issue arise in the distinct context 
of calculating comparative information. 
Comparative information should provide investors 
with context about whether a particular fund has 
relatively high or low ownership costs. In 
calculating comparative information, using 
groupings of securities that are overly narrow 
would not lead to data that adequately informs 
investors about the ownership costs associated with 

alternative investment. When identifying the 
presence or absence of differential compensation, 
however, groupings of securities that are overly 
broad (such as including no-load funds with load 
funds) may invariably lead to ‘‘yes’’ answers, which 
would not appear useful to investors.

78 Such a requirement would prevent broker-
dealers from providing responsive information that 
is obscured with excess verbiage. Such a 
requirement would mean that the information must 
be disclosed in tabular form in a highly visible 
location within a disclosure document, possible 
using easily navigable links within a particular 
webpage.

79 Such a requirement that the web site not be 
restricted in access does not preclude the broker-
dealer from taking down the web sit on occasion as 
necessary to perform technical maintenance.

80 Such a requirement would not apply to a 
broker-dealer that does not maintain a principal 
Internet homepage.

81 Moreover, we could require that broker-dealers 
update Internet-disclosed information promptly to 
maintain accuracy, and that information about 
payments received in the prior fiscal year be 
updated within 30 days of the end of that fiscal 
year.

82 Some relevant disclosures, such as dealer 
concessions and trailing commissions, may vary by 
the share class of the covered security. Other 
disclosures, such as revenue sharing payments, 
would appear less likely to differ according to share 
class.

83 More than one broker-dealer may receive 
compensation in connection with a customer’s 
purchase of a covered security. For example, a 
selling broker may receive the bulk of a sales fee, 
while the fund distributor retains a small portion 
of that fee. Also, introducing firms and clearing 
firms both may receive revenue sharing payments 
from a fund complex.

number? Commenters particularly are 
invited to discuss the following: 

Q. Should we require broker-dealers 
to identify any payment practice by 
which the issuer or underwriter of a 
covered security pays the broker-dealer 
a higher dealer concession than the 
average dealer concession paid in 
connection with the distribution of 
comparable covered securities, when 
that would lead an associated person of 
the broker-dealer to receive more in 
connection with the sale of the covered 
security than would be received in 
connection with the sale of the same 
dollar amount of a comparable covered 
security that pays an average dealer 
concession? For those purposes, should 
we state that the term ‘‘comparable’’ 
means another covered security that is 
not materially different with respect to 
its investment objectives and goals, its 
principal investment strategies, and the 
principal risks that would result from 
investing in such a covered security?

Q. Would such a requirement be 
feasible to implement? Would the 
resulting information be useful to 
investors? Commenters may wish to 
suggest criteria for identifying 
‘‘comparable’’ funds, or suggest existing 
databases or assessments that would be 
useful in identifying practical fund 
categories. For example, would it be 
appropriate for groupings of 
‘‘comparable’’ funds to be based on 
particular investment styles such as 
‘‘mid cap value’’ or industry sector 
funds? Would it be appropriate for such 
groupings to distinguish between index 
funds and actively managed funds? 
Would it be appropriate for broker-
dealer to determine that a particular set 
of funds are ‘‘comparable’’ if they fall 
within the same grouping set forth by a 
nationally recognized categorization of 
mutual funds, such as categorizations 
provided by major vendors of mutual 
fund data? Should the Commission seek 
to develop and publish lists of 
‘‘comparable’’ covered securities for 
these purposes? Alternatively, even if a 
focus on relatively narrow categories of 
funds would accurately reflect 
differences in broker-dealer 
compensation among categories, should 
the groupings of funds be broader to 
more fully inform investors about the 
differences in incentives facing broker-
dealer personnel? 77

Q. Should Internet disclosure of 
differential compensation related to 
share classes sold reflect higher 
payments for selling class C shares as 
well as for selling class B shares? 

F. Format of Disclosure 

The format of disclosure would be 
critical to any Internet disclosure 
requirements, as well as disclosure 
through any other media. Information 
may be presented on the Internet in a 
way that is intended to obscure, rather 
than to provide effective disclosure. 
Moreover, many investors may not have 
Internet access or choose to use the 
Internet. Accordingly, we would require 
that broker-dealers maintain a toll-free 
telephone number which investors 
could call to request that a copy of the 
Internet-based disclosure be mailed to 
them. 

To promote clear disclosure, we 
propose to require information to be 
highly visible, and depicted in a tabular 
format that is readily communicated to 
investors, using layout and presentation 
that is reasonably calculated to draw 
attention to the required information, 
and using terminology that is intended 
to clearly convey required information 
to the investor.78 Other requirements 
that we could adopt as appropriate 
could include: (i) That the web site not 
(1) have password protection, (2) require 
entry of identifying information or e-
mail addresses, or (3) otherwise restrict 
access (including the use of 
‘‘cookies’’); 79 (ii) that disclosure be 
assessed through a prominent link on 
the principal Internet homepage of the 
broker-dealer; 80 and (iii) that the web 
site have a Uniform Resource Locator 
(URL) that is disclosed in conjunction 
with all point of sale and confirmation 
disclosures that the broker-dealer is 
required to make. We also could require 
broker-dealers to maintain toll-free 
telephone numbers by which investors 

can request a mailed copy of the 
disclosure information.81

Any Internet disclosure requirement 
should require broker-dealers to depict 
information that is specific to share 
classes, as applicable.82 We would 
anticipate that multiple broker-dealers 
may opt to maintain disclosure on a 
single webpage, with each recipient of 
a payment clearly identified.83

Request for comment. How could an 
Internet disclosure rule be crafted to 
ensure that investors have clear and 
timely access to information? 
Commenters particularly are invited to 
discuss the following: 

Q. Should an Internet-based 
disclosure requirement mandate the use 
of a standardized template or form, or 
the use of certain terminology, perhaps 
as defined by the Commission? 
Commenters are invited to suggest 
models. 

Q. Should broker-dealers be permitted 
to establish links to third-party web 
sites where definitions or explanatory 
information would be available? Would 
this help investors better understand the 
meaning of particular terms without 
providing information that potentially is 
biased or otherwise misleading? 
Alternatively, would such a linkage to 
third-party web sites have the effect of 
seeming to endorse that information? 
Commenters may wish to refer to 
existing Internet web sites that contain 
glossaries or other models of 
terminology or explanatory materials 
that could effectively improve investor 
understanding of this information. 
Should the Commission instead adopt 
standardized definitions to be used in 
this context?

Q. What are the costs to broker-
dealers of making the kinds of Internet-
based disclosures discussed in this 
section? In addition, what are the cost 
savings to broker-dealers of making such 
Internet-based disclosures in lieu of 
making such disclosures at the point-of-
sale or on transactions confirmations? 

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84 See Proposing Release, Section VI. The 
Commission also proposed amendments to Form 
N–1A that would enhance disclosure of sales loads 
in the fund prospectus.

85 Proposed subparagraph (c) to Item 8 (now Item 
7) of Form N–1A.

86 We recently brought enforcement cases against 
fund advisers concerning their failure to adequately 
disclose arrangements for increased ‘‘shelf space’’ 
with various broker-dealer. See In the Matter of 
Franklin Advisers, Inc. and Franklin/Templeton 
Distributors, Inc., Investment Advisers Act Release 
No. 2337 (December 13, 2004); In the Matter of PA 

Fund Management LLC, et al., Investment Advisers 
Act Release No. 2295 (September 15, 2004); In the 
Matter of Massachusetts Financial Services 
Company, Investment Advisers Act Release No. 
2224 (March 31, 2004).

87 See the request for additional comment relating 
to the proposed definition of ‘‘revenue sharing’’ 
supra, part II.A.3.

Would there be cost savings or other 
efficiencies from maintaining 
disclosures for multiple broker-dealers 
on a single web page? 

Q. Is it appropriate and useful for the 
Commission to require that broker-
dealers update Internet-disclosed 
information promptly to maintain 
accuracy? Should the Commission also 
require that broker-dealers update 
information about payments received in 
the prior fiscal year within 30 days of 
the end of that fiscal year? 

Q. Would it be useful to investors if 
we require broker-dealers to maintain a 
toll-free number investors can call to 
request copies of the Internet-based 
disclosure be mailed to them? What 
procedures would be necessary to 
ensure compliance with this 
requirement? Commenters may wish to 
discuss the cost to broker-dealers of 
implementing such a requirement. 

V. Prospectus Disclosure of Revenue 
Sharing Payments 

Along with the amendments 
discussed above, the Commission 
proposed to amend Form N–1A in order 
to improve disclosure in fund 
prospectuses of revenue sharing 
payments.84 If any person within a fund 
complex makes revenue sharing 
payments, the proposed amendment 
would have required a fund to disclose 
that fact in its prospectus and also to 
disclose that specific information about 
revenue sharing payments is included 
in the confirmation and point of sale 
disclosure as originally proposed.85 We 
are considering whether to adopt 
modified or additional Form N–1A 
requirements to complement the 
disclosure by broker-dealers on which 
we are requesting comment in this 
release. Specifically, we are considering 
whether it may be helpful to investors 
to receive additional information in a 
fund’s prospectus regarding revenue 
sharing payments.86

Request for comment. Are prospectus 
disclosure requirements regarding 
revenue sharing payments, beyond 
those we originally proposed, 
appropriate or necessary? Specifically, 
we seek comment on whether a brief 
description of such revenue sharing 
payments should be required in a 
mutual fund’s prospectus. 

Q. If any person within a fund 
complex makes revenue sharing 
payments, should a fund be required to 
disclose this fact in its prospectus? 
Should a fund be required to include 
information relating to these payments, 
such as the services provided in return 
for the payments; the factors considered 
in determining the payments to be made 
(including the number of fund shares 
sold by a financial intermediary, the 
amount of fund assets held through that 
intermediary, the redemption rate of 
fund shares held through that 
intermediary, and the quality of the 
intermediary’s relationship with the 
fund’s principal underwriters); and the 
basis on which such payments are made 
(e.g., percentage of total sales of fund 
shares by a financial intermediary, 
percentage of total fund assets 
attributable to that financial 
intermediary)? Should a fund also be 
required to disclose the maximum 
amount of revenue sharing payments to 
a single financial intermediary 
annually? If so, how should this 
disclosure be stated (e.g., as a dollar 
amount, a percentage of net assets, or 
otherwise), and what period of time 
should it cover (e.g., the most recent 
fiscal year, the projected total for the 
current fiscal year, or some other 
period)? Should any other information 
be required? 

Q. Should we also require disclosure 
of the aggregate amounts of revenue 
sharing payments that a fund makes to 
all financial intermediaries? If so, how 
should this disclosure be stated (e.g., as 
a dollar amount, a percentage of net 
assets, or otherwise), and what period of 
time should it cover (e.g., the most 
recent fiscal year, the projected total for 
the current fiscal year, or some other 
period)? Should any other information 
be required? 

Q. We also invite comment on the 
costs associated with providing 
enhanced disclosure in the prospectus 
relating to revenue sharing payments, 
including quantification of such 
payments. To what extent would the 
disclosure of specific information 
relating to such payments increase 
compliance costs? 

Q. If specific information about 
revenue sharing payments is available 
through a broker-dealer’s Web site or 
toll-free telephone number, should a 
fund be required to disclose that fact in 
its prospectus, either in addition or as 
an alternative to other disclosure? 

Q. For purposes of enhanced 
prospectus disclosure of revenue 
sharing payments, what definition of 
‘‘revenue sharing’’ should the 
Commission use? Should it be 
consistent with that used in connection 
with the proposed broker-dealer 
disclosure rules? Commenters are asked 
to address, among other things, the 
questions about the definition of 
‘‘revenue sharing’’ that are raised above 
in the context of the proposed broker-
dealer disclosure requirements.87

Q. Commenters are also asked to 
address what, if any, disclosure 
requirements should be added to Forms 
N–3, N–4, and N–6 with respect to 
revenue sharing payments? In this 
context, we invite commenters to 
address the same questions raised above 
relating to disclosure of revenue sharing 
payments by mutual funds, as well as 
any other relevant matters. 

VI. General Request for Comment 

In addition to the supplemental 
requests for comment set forth above, 
the Commission renews its requests for 
comment on the proposals that were 
published in the Proposing Release. In 
its evaluation of further rulemaking 
action, the Commission will consider, in 
addition to the comments received in 
response to this release, all comments 
received in response to the Proposing 
Release.

By the Commission.
Dated: February 28, 2005. 

Margaret H. McFarland, 
Deputy Secretary.
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[FR Doc. 05–4215 Filed 3–3–05; 8:45 am] 
BILLING CODE 8010–01–C

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