Rule Amendments Relating to Multiple Class and Series Investment Companies

SECURITIES AND EXCHANGE
COMMISSION
17 CFR Part 270
[Release No. IC–22835; File No. S7–24–96] RIN 3235–AG72 Rule Amendments Relating to Multiple Class and Series Investment Companies AGENCY: Securities and Exchange Commission. ACTION: Final rule. SUMMARY: The Commission is adopting amendments to the rule under the Investment Company Act of 1940 that permits open-end management investment companies (‘‘funds’’) to issue multiple classes of shares representing interests in the same portfolio. The amendments expand and clarify the methods by which a multiple class fund may allocate among its classes income, gains and losses, and expenses not allocated to a particular class, and clarify the shareholder voting provisions of the rule. The Commission also is adopting a technical amendment that clarifies the application to series funds of the rule under the Investment Company Act that governs the use of fund assets to pay for the distribution of fund shares. EFFECTIVE DATE: November 10, 1997. FOR FURTHER INFORMATION CONTACT:
Thomas M. J. Kerwin, Senior Counsel, Office of Regulatory Policy, at (202) 942–0690, or, regarding accounting issues, John S. Capone, Assistant Chief Accountant, Office of the Chief Accountant, at (202) 942–0590, in the Division of Investment Management, Mail Stop 10–2, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. Requests for formal interpretive advice should be directed to the Office of Chief Counsel at (202) 942–0659, Division of Investment Management, Mail Stop 10– 6, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. SUPPLEMENTARY INFORMATION: The Commission is adopting amendments to rules 18f–3 [17 CFR 270.18f–3] and 12b– 1 [17 CFR 270.12b–1] under the Investment Company Act of 1940 [15 U.S.C. 80a] (the ‘‘Investment Company Act’’). Executive Summary The Commission is adopting amendments to rule 18f–3 under the Investment Company Act, the rule that permits a fund to issue multiple classes of shares representing interests in the same investment portfolio. The amendments expand the specified methods a multiple class fund may use to allocate among its classes income, gains and losses (including unrealized appreciation or depreciation), and expenses not allocated to a particular class. The amendments also permit a fund to use any other allocation method that the fund’s board of directors determines is fair to the shareholders of each class. In addition, the amendments clarify the shareholder voting rights provision of the rule. The Commission also is adopting a technical amendment to rule 12b–1 under the Investment Company Act, the rule that governs the use of fund assets to pay for the distribution of fund shares in accordance with a ‘‘rule 12b–1 plan.’’ The amendment codifies existing interpretations of how various provisions of the rule apply to a ‘‘series’’

Federal Register / Vol. 62, No. 192 / Friday, October 3, 1997 / Rules and Regulations 51763 1 In this release, ‘‘gains and losses’’ include both realized gains and losses and unrealized appreciation and depreciation. ‘‘Fundwide expenses’’ may include expenses that are attributable to more than one class but fewer than all classes, such as the costs of adding new classes to an existing multiple class structure. See Exemption for Open-End Management Investment Companies Issuing Multiple Classes of Shares; Disclosure by Multiple Class and Master-Feeder Funds; Class Voting on Distribution Plans, Investment Company Act Release No. 20915 at nn.26–27 and accompanying text (Feb. 23, 1995) [60 FR 11876 (Mar. 2, 1995)] [hereinafter 1995 Release]. 2Rule 18f–3(c)(1) [17 CFR 270.18f–3(c)(1)]; see amended rule 18f–3(c)(1)(i) [17 CFR 270.18f– 3(c)(1)(i)]. 3Rule 18f–3(c)(2) [17 CFR 270.18f–3(c)(2)]; see amended rule 18f–3(c)(2)(i) [17 CFR 270.18f– 3(c)(2)(i)] (defining a daily dividend fund as ‘‘any company that has a policy of declaring distributions of net investment income daily, including any money market fund that determines net asset value using the amortized cost method permitted by
section 270.2a–7 [rule 2a–7]’’).
4Rule 18f–3(c)(2)(i) [17 CFR 270.18f–3(c)(2)(i)]; see amended rule 18f–3(c)(1)(iv) [17 CFR 270.18f– 3(c)(1)(iv)]. Use of this method in those circumstances is equivalent to allocation based on relative net assets. The rule also requires funds using this method to obtain the agreement of their service providers that, to the extent necessary to assure that all classes maintain the same NAV per share, providers will waive or reimburse class expenses. Rule 18f–3(c)(2)(i). The amended rule clarifies that amounts waived or reimbursed by service providers under these agreements may not be carried forward or recouped later. Amended rule 18f–3(c)(1)(iv). 5Rule 18f–3(c)(2)(ii) [17 CFR 270.18f–3(c)(2)(ii)]; see amended rule 18f–3(c)(1)(iii), (c)(2)(iii) [17 CFR 270.18f–3(c)(1)(iii), (c)(2)(iii)]. The settled shares method is consistent with the policy of many daily dividend funds to withhold dividends from non￾settled shares. Payment of dividends on non-settled shares would dilute dividends paid on settled shares, since fund income is attributable only to settled shares. See Rule Amendments Relating to Multiple Class and Series Investment Companies, Investment Company Act Release No. 22203 at n.7 (Sept. 9, 1996) [61 FR 49022 (Sept. 17, 1996)] [hereinafter Proposing Release] (investor’s payment in federal funds may not be collected until three days after share purchase; at time of purchase fund may buy portfolio securities to be paid for in three days, but fund does not earn interest on securities until it makes payment; buying other portfolio securities that settle daily against federal funds is not feasible until investor’s payment has been collected). 6See Proposing Release, supra note . 7See Letter from Subcommittee on Investment Companies and Investment Advisers, Committee on Federal Regulation of Securities, Section of Business Law, American Bar Association (‘‘ABA’’), to Jonathan G. Katz, Secretary, SEC (Nov. 19, 1996) (hereinafter ‘‘ABA Letter’’); Letter from Gregory M. Smith, Director-Operations, Investment Company Institute (‘‘ICI’’), to Jonathan G. Katz, Secretary, SEC (Nov. 18, 1996) (hereinafter ‘‘ICI Letter’’). 8Such orders may require compliance with conditions, such as disclosure of differences among multiple classes, that do not apply to multiple class funds that rely on rule 18f–3 and related requirements of Form N–1A [17 CFR 239.15A, 274.11A]. 9See amended rule 18f–3(c)(1)(iii). 10Amended rule 18f–3(c)(1)(iii). The staff of the Commission previously approved use of this combination of methods. See Letter from the Division of Investment Management to Investment Company Chief Financial Officers at 5 (Nov. 2, 1995). 11See ICI Letter, supra note 7, at 2 (daily dividend funds generally process purchase orders when received, before the collection of payment in federal funds, to enable the purchaser of non-settled shares to participate in changes in NAV per share from appreciation or depreciation of portfolio securities during collection period;
most funds nevertheless pay dividends only on settled shares). Combining these methods may be essential if a fund maintains the same NAV per share for all classes, since allocating gains and losses (which affect NAV) based only on settled shares could cause a divergence in NAV among classes. See Proposing Release, supra note , at n.11 (use of settled shares method requires reduction of net assets of fund and each class by unpaid subscriptions; percentage reduction of each class’s net assets would vary for each class because of differing amounts of non￾settled shares; resulting different allocations of gains and losses to each class would affect NAV differently). 12Amended rule 18f–3(c)(1)(ii), (c)(2)(iv) [17 CFR 270.18f–3(c)(1)(ii), (c)(2)(iv)]. 13Amended rule 18f–3(c)(2)(iv). For example, if fundwide expenses amounted to .75% of net assets for each class on average, and Class A were assessed a class expense ratio of .30% of net assets annually Continued fund (i.e., a fund that offers investors an opportunity to invest in one or more portfolios, each of which has a specific investment objective).
I. Discussion
A. Rule 18f–3
Rule 18f–3 under the Investment Company Act establishes a framework for a fund’s issuance of multiple classes of shares representing interests in the same portfolio. A fund generally establishes a multiple class arrangement to offer investors a choice of methods for paying distribution costs or to allow the fund to use alternative distribution channels more efficiently. Rule 18f–3 addresses issues that may create conflicts among multiple classes, including how a fund must allocate to each class its share of income, gains and losses, and expenses that are not allocated to a particular class (‘‘fundwide expenses’’).1 Rule 18f–3(c) permits a fund generally to allocate income, gains and losses, and fundwide expenses based on the ratio of class net assets to fund net assets (‘‘relative net assets’’).2 The rule also permits a fund that declares dividends daily (a ‘‘daily dividend fund’’), such as a money market fund, to select either of two alternative allocation methods.3 A daily dividend fund that maintains the same net asset value (‘‘NAV’’) per share in each class may allocate income, gains and losses, and fundwide expenses to each share without regard to class.4 A daily dividend fund that maintains the same NAV per share in each class may also make these allocations to each class based on relative net assets after subtracting the value of subscriptions for non-settled shares (i.e., shares for which payment in federal funds has not been received) (the ‘‘settled shares method’’).5 In September 1996 the Commission proposed amendments to rule 18f–3 to give daily dividend funds greater flexibility in using the settled shares method, to permit funds to use a new allocation method (the ‘‘simultaneous equations method’’), and to clarify certain other aspects of the rule.6 The Commission received letters from two commenters in response to the proposal, both generally favoring the proposed amendments.7 The Commission is adopting the proposed amendments with certain revisions, as described below.

1. Expanded Allocation Methods
   a. Settled Shares Method. Some daily dividend funds use the settled shares method in reliance upon exemptive orders that predate the adoption of rule 18f–3.8 These funds have been unable to rely on rule 18f–3 because they do not maintain the same NAV per share in each class, a condition for use of the settled shares method under the rule. Because the settled shares method produces appropriate allocations even if NAV per share differs among classes, the Commission proposed to amend rule 18f–3 to permit a daily dividend fund to use the settled shares method without maintaining the same NAV per share in each class. Commenters supported the amendment, which the Commission is adopting as proposed.9 The Commission is also amending rule 18f–3 to clarify that a daily dividend fund may simultaneously use the settled shares method to allocate income and fundwide expenses and use the relative net assets method to allocate gains and losses.10 This combination of methods is consistent with fund policies that commonly permit the participation of non-settled shares in any increase or decrease in NAV that results from appreciation or depreciation of portfolio securities, while excluding non-settled shares from participation in daily dividends.11 b. Simultaneous Equations Method. The Commission is adopting, as proposed, an amendment to rule 18f–3 to permit any fund to allocate income, gains and losses, and fundwide expenses based on an additional method, the ‘‘simultaneous equations method.’’ 12 Under this method, allocations are based on simultaneous equations designed to produce an annualized rate of return of each class that generally differs from that of the other classes only by the expense differentials among the classes.13 A fund

51764 Federal Register / Vol. 62, No. 192 / Friday, October 3, 1997 / Rules and Regulations and Class B were assessed .80% for class expenses, use of the simultaneous equations method during a full year that produced gross returns of 10.75% should result in an annualized rate of return of approximately 9.70% for Class A and 9.20% for Class B. 14The equations should allocate the day’s income, realized gains (or losses), unrealized appreciation (or depreciation), and fundwide expenses and reallocate each class’s undistributed net investment income, undistributed realized gains (or losses), and unrealized appreciation (or depreciation). 15An example of equations for a fund having two classes of shares appeared in an appendix to the Proposing Release, and is attached to this release as
Appendix A.
16See ICI Letter, supra note 7, at 2 (recommending that Commission not specify particular equations). Any equations selected generally should be applied on a consistent basis. See infra note 21 and accompanying text. 17Amended rule 18f–3(c)(1)(v) [17 CFR 270.18f– 3(c)(1)(v)]; see section 2(a)(19) of the Investment Company Act [15 U.S.C. 80a–2(a)(19)] (defining ‘‘interested person’’ of a fund). 18See supra note 13 and accompanying text. 19The allocation methods specified in the rule provide standards for determining whether a new allocation method is fair to shareholders. 20The amended rule should not impose significant additional burdens on fund boards, which remain free to permit only the use of one of the allocation methods specified in the rule. 21Amended rule 18f–3(c)(1) [17 CFR 270.18f– 3(c)(1)]; see also 1995 Release, supra note 1, at text accompanying nn. 24–25. Because the selected allocation method should be consistently applied from period to period, changes in the method are expected to be rare. See also rule 18f–3(d) [17 CFR 270.18f–3(d)] (before any material amendment of a plan governing a multiple class arrangement, the fund’s directors must determine that the plan as proposed to be amended, including the expense allocation, is in the best interests of each class individually and the fund as a whole). 22The purchase class typically pays an asset￾based distribution fee and a contingent deferred sales charge. The conversion feature is intended to permit long-term shareholders to receive the benefit of a lower distribution fee (or no fee) charged to the target class. See Proposing Release, supra note 5, at n.16 and accompanying text. 23 In the alternative, the fund could establish a new target class for purchase class shareholders on the same terms that applied to the target class before the increase. 24Amended rule 18f–3(e)(2)(iii) [17 CFR 270.18f– 3(e)(2)(iii)]. An increase that implicates this provision would include, for example, a proposal to increase distribution fees materially for the target class under a rule 12b–1 plan or certain shareholder services plans. 25Amended rule 12b–1(g) [17 CFR 270.12b–1(g)]. 26Rule 12b–1(b) [17 CFR 270.12b–1(b)]. 27See rule 12b–1(b)(1), (b)(3)(iii) to (iv)(A), (b)(4), (g) [17 CFR 270.12b–1(b)(1), (b)(3)(iii) to (iv)(A), (b)(4), (g)]. 28Rule 12b–1(g). 29Amended rule 12b–1(g); see Distribution of Shares by Registered Open-End Management Investment Company, Investment Company Act Release No. 22201 at n.7 and accompanying text (Sept. 9, 1996) [61 FR 49010 (Sept. 17, 1996)] (rule 12b–1 has been interpreted to treat each series of a fund as a separate fund; a series or class not publicly offered should be treated in same way as a fund not publicly offered). The amended rule also deletes current rule 12b–1(g)’s description of certain voting rights of purchase class shareholders under rule 18f–3, which is a matter addressed by rule 18f– 3 itself. The amended rule substitutes a reference to amended rule
18f–3(e)(2)(iii). Amended rule 12b–1(g). using this method would allocate each day’s income, gains and losses, and fundwide expenses to each class, and simultaneously reallocate cumulative undistributed income and undistributed or unrealized capital items among the classes.14 Commenters agreed that the results derived from this method are consistent with the purpose of the rule’s allocation provisions. The amended rule does not specify particular equations to be used in implementing this method.15 Appropriate equations may vary depending on the number of classes offered and other factors such as whether expense differentials among classes are fixed or variable. Commenters also confirmed the Commission’s understanding that equations may be further refined as funds gain more experience in using this method 16
c. Other Allocation Methods. The
Commission is also amending rule 18f– 3 to permit a fund to use any appropriate allocation method not specified in the rule if the fund’s directors, including a majority of directors who are not interested persons of the fund, determine that the method is fair to each class of shareholders.17 The amendment also would require directors to determine that under the new method, the annualized rate of return of each class will generally differ from that of the other classes only by the expense differentials among the classes.18 This amendment will provide funds with flexibility and avoid the possible need for further administrative relief to permit new allocation methods that may be developed. The Commission believes it is appropriate to require a specific board determination concerning the fairness of an alternative allocation method to assure that the selection of such a method is fair to each class.19 In making this determination, the fund board may reasonably rely on the opinions of experts such as accounting firms.20 A fund would be expected to apply on a consistent basis any allocation method selected under this or any other provision of the rule.21
2. Voting Rights
Rule 18f–3 contains certain conditions that are applicable to arrangements involving a class of shares with one type of distribution charge (the ‘‘purchase class’’) that automatically convert into another class (the ‘‘target class’’) after a specified period of time.22 The rule requires a fund having such an arrangement to obtain the approval of the shareholders of the purchase class whenever the fund materially increases expenses for the target class.23 The amended rule, as proposed, clarifies that this provision applies only if the expense increase is submitted for a separate vote of target class shareholders.24 B. Rule 12b–1 The Commission also is adopting as proposed a technical amendment to rule 12b–1 that clarifies the rule’s application to separate series or portfolios of a fund.25 Rule 12b–1 permits the use of fund assets to finance the distribution of fund shares pursuant to a written plan that describes the distribution financing arrangement and contains certain conditions.26 Among other conditions, the rule 12b–1 plan must allow fund shareholders to vote on certain matters including approval, amendment, or termination of the plan.27 Rule 12b–1 provides that a plan may cover more than one class of shares if the plan’s provisions are severable for each class and if votes by shareholders and other required actions are taken separately for each class.28 The amendment codifies prior interpretations that a rule 12b–1 plan also may cover more than one series or portfolio under the same conditions applicable when a plan covers more than one class.29
II. Cost/Benefit Analysis and Effects On
Competition, Efficiency, And Capital Formation In the proposing release, the Commission provided a Cost-Benefit Analysis on the amendments and requested comments. No comments were received on the analysis. The Commission is sensitive to the costs and benefits imposed by its rules. The amendments to rule 18f–3 provide greater flexibility to multiple class funds in allocating to each class its proportionate share of income, gains and losses, and fundwide expenses. The amended rule gives every fund a selection of one or more new specified methods without limiting the use of previously authorized methods. The amended rule also authorizes the use of an unspecified method selected by the fund subject to appropriate safeguards. A fund’s selection of any method permitted by the amendments should not substantially increase the fund’s costs in making allocations. The amended rule also reduces costs by allowing more funds to rely on the rule instead of obtaining and complying with exemptive orders, and by eliminating

Federal Register / Vol. 62, No. 192 / Friday, October 3, 1997 / Rules and Regulations 51765 30 15 U.S.C. 80a–2(c). unnecessary requirements to solicit votes of purchase class shareholders. The amendment to rule 12b–1 does not impose a burden because it codifies an existing interpretation of the rule.
Section 2(c) of the Investment
Company Act provides that whenever the Commission is engaged in rulemaking and is required to consider or determine whether an action is necessary or appropriate in the public interest, the Commission must consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation.30 The Commission has considered the amendments to rule 18f–3 and rule 12b–1 in light of these standards. The Commission believes the amendments to rule 18f–3 are consistent with the public interest and may promote efficiency and competition because they broaden the scope and flexibility of an exemptive rule, may reduce costs and other burdens for funds, and may thereby encourage more funds to offer multiple classes of shares. The Commission believes that the amendments will have no adverse effect on capital formation. The amendment to rule 12b–1, as a codification of an existing interpretation of the rule, will not have significant effects on efficiency, competition, or capital formation.
III. Summary of Final Regulatory
Flexibility Analysis
The Initial Regulatory Flexibility Analysis (‘‘IRFA’’), which was prepared in accordance with 5 U.S.C. 603, was published in Investment Company Act Release No. 22203. No comments were received on the IRFA. The Commission has prepared a Final Regulatory Flexibility Analysis (‘‘FRFA’’) in accordance with 5 U.S.C. 604. The FRFA indicates that the amendments to rule 18f–3 enable multiple class funds, including small entities, to rely on the rule instead of exemptive orders and to benefit from more flexible compliance requirements by expanding specified allocation methods and permitting the use of an unspecified method if directors determine that it is fair. In addition, the FRFA states that the amendments clarify compliance requirements by eliminating unnecessary voting provisions consistent with the Commission’s original intent. The FRFA explains that the amendment to rule 12b–1 codifies existing interpretations treating multiple series of a series fund like multiple classes of a portfolio. The FRFA notes that in response to comments from the public, the Commission modified the amendments to permit the selection of unspecified methods. The FRFA also discusses the amendments’ effect on small entities that are registered open-end management investment companies. For purposes of the amendments, small entities are those having net assets of $50 million or less as of the end of their most recent fiscal year. The Commission estimates that there are 500 small entities out of 3000 active open-end management investment companies, and that 43 of those 500 offer multiple classes of shares. The FRFA states that the rules do not impose any new reporting, recordkeeping, or other compliance requirements. The FRFA also discusses the Commission’s efforts to minimize significant economic impact on small entities, noting that the amendments’ effect is generally positive for all affected funds including small entities. The FRFA notes that the Commission considered several alternatives that might minimize any effect on small entities, including (a) the establishment of differing compliance or reporting requirements or timetables that take into account the resources available to small entities; (b) the clarification, consolidation, or simplification of compliance and reporting requirements under the rules for small entities; (c) the use of performance rather than design standards; and (d) an exemption from coverage of the rules or any part of the rules for small entities. The FRFA states that the amendments generally increase flexibility, simplify or clarify existing compliance requirements, and introduce performance standards by permitting the use of an unspecified allocation method determined to be fair. In light of these considerations, the FRFA states that it would be inconsistent with the purposes of the Act to exempt small entities from the amendments or to specify different requirements for small entities. Different compliance or reporting requirements for small
entities are not necessary because the rules do not establish any new reporting, recordkeeping, or compliance requirements. The Commission has determined that it is not feasible to further clarify, consolidate, or simplify the rules for small entities consistently with the protection of investors. Cost-benefit information in the ‘‘Cost/ Benefit Analysis’’ section of this Release is reflected in the Analysis. A copy of the Final Regulatory Flexibility Analysis may be obtained by contacting Thomas M. J. Kerwin, Mail Stop 10–2, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
IV. Statutory Authority
The Commission is amending rule 12b–1 pursuant to the authority set forth in sections 12(b) and 38(a) of the Investment Company Act [15 U.S.C. 80a–12(b), –37(a)], and is amending rule 18f–3 under sections 6(c), 18(i), and 38(a) of the Investment Company Act [15 U.S.C. 80a–6(c), –18(i), –37(a)]. List of Subjects in 17 CFR Part 270 Investment companies, Reporting and recordkeeping requirements, Securities. Text Of Rule Amendments For the reasons set out in the preamble, Title 17, Chapter II of the Code of Federal Regulations is amended as follows:
PART 270—RULES AND
REGULATIONS, INVESTMENT
COMPANY ACT OF 1940

1. The authority citation for Part 270
   continues to read, in part, as follows:
   Authority: 15 U.S.C. 80a–1 et seq., 80a–37, 80a–39 unless otherwise noted;

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2. Section 270.12b–1 is amended by
   revising paragraph (g) to read as follows:
   § 270.12b–1 Distribution of shares by registered open-end management investment company.

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(g) If a plan covers more than one series or class of shares, the provisions of the plan must be severable for each series or class, and whenever this
section provides for any action to be
taken with respect to a plan, that action must be taken separately for each series or class affected by the matter. Nothing in this paragraph (g) shall affect the rights of any purchase class under § 270.18f–3(e)(2)(iii).
3. Section 270.18f–3 is amended by
revising paragraphs (c) and (e)(2)(iii) to read as follows:
§ 270.18f–3 Multiple class companies.

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(c) (1) Income, realized gains and losses, unrealized appreciation and depreciation, and Fundwide Expenses shall be allocated based on one of the following methods (which method shall be applied on a consistent basis):
(i) To each class based on the net assets of that class in relation to the net assets of the company (‘‘relative net assets’’); (ii) To each class based on the Simultaneous Equations Method; (iii) To each class based on the Settled Shares Method, provided that the

51766 Federal Register / Vol. 62, No. 192 / Friday, October 3, 1997 / Rules and Regulations company is a Daily Dividend Fund (such a company may allocate income and Fundwide Expenses based on the Settled Shares Method and realized gains and losses and unrealized appreciation and depreciation based on relative net assets); (iv) To each share without regard to class, provided that the company is a Daily Dividend Fund that maintains the same net asset value per share in each class; that the company has received undertakings from its adviser, underwriter, or any other provider of services to the company, agreeing to waive or reimburse the company for payments to such service provider by one or more classes, as allocated under paragraph (a)(1) of this section, to the extent necessary to assure that all classes of the company maintain the same net asset value per share; and that payments waived or reimbursed under such an undertaking may not be carried forward or recouped at a future date; or (v) To each class based on any other appropriate method, provided that a majority of the directors of the company, and a majority of the directors who are not interested persons of the company, determine that the method is fair to the shareholders of each class and that the annualized rate of return of each class will generally differ from that of the other classes only by the expense differentials among the classes. (2) For purposes of this section:
(i) Daily Dividend Fund means any company that has a policy of declaring distributions of net investment income daily, including any money market fund that determines net asset value using the amortized cost method permitted by § 270.2a–7; (ii) Fundwide Expenses means expenses of the company not allocated to a particular class under paragraph (a)(1) of this section; (iii) The Settled Shares Method means allocating to each class based on relative net assets, excluding the value of subscriptions receivable; and (iv) The Simultaneous Equations Method means the simultaneous allocation to each class of each day’s income, realized gains and losses, unrealized appreciation and depreciation, and Fundwide Expenses and reallocation to each class of undistributed net investment income, undistributed realized gains or losses, and unrealized appreciation or depreciation, based on the operating results of the company, changes in ownership interests of each class, and expense differentials between the classes, so that the annualized rate of return of each class generally differs from that of the other classes only by the expense differentials among the classes.

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(e) * * *
(2) * * *
(iii) If the shareholders of the target class approve any increase in expenses allocated to the target class under paragraphs (a)(1)(i) and (a)(1)(ii) of this
section, and the purchase class
shareholders do not approve the increase, the company will establish a new target class for the purchase class on the same terms as applied to the target class before that increase.

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Dated: September 26, 1997.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
Note: Appendix A to the preamble will not appear in the Code of Federal Regulations.
Appendix A—Simultaneous Equations
Method
The equations set forth below are examples of a set of simultaneous equations that could be used as an allocation method in a multiple class fund with two classes at the end of day t. The inception date of class B shares is assumed to be on or after the inception date of class A shares. Equation 1: At + Bt = Gt + Ct Equation 2: At/Sat¥Bt/Sbt = dx(NAV0) where:
At: the total net assets to be allocated to class A at the end of day t Bt: the total net assets to be allocated to class B at the end of day t Gt: the cumulative undistributed net change in assets from operations for the fund at the end of day t Ct: the cumulative capital for the fund at the end of day t Sat: the number of shares in class A at the end of day t Sbt: the number of shares in class B at the end of day t d: the time adjustment factor, calculated as the number of days since the inception of class B or the ex-dividend date of the last income distribution, whichever is more recent, divided by 365 x: the differential in expense ratios between the two classes NAV0: the NAV per share for class A and class B on day 0, where day 0 is either the day class B commences trading or the ex-dividend date of the last income distribution, whichever is more recent. [FR Doc. 97–26145 Filed 10–2–97; 8:45 am] BILLING CODE 8010–01–P