On February 15, 2017, the staff of the SEC's Division of Investment Management (the Staff) published Frequently Asked Questions (FAQs) concerning its December 2016 Guidance Update on mutual fund fee structures, including sales load variations (the Guidance Update), and its January 2017 interpretive letter issued to Capital Group, permitting brokers to charge commissions on sales of mutual fund "Clean Shares" (the CG Letter). The FAQs address six questions under three headings: (1) Variations in Sales Loads; (2) Template Filing Relief; and (3) the CG Letter.
Variations in Sales Loads
In the Guidance Update, the Staff noted that funds are considering "streamlined sales load structures to simplify costs for investors and to help address operational and compliance challenges that can exist for Intermediaries that sell shares of multiple Funds." The FAQs provide guidance on the following issues associated with implementing and disclosing these sales load variations:
- The Staff will not object if a fund that has received template filing relief includes disclosure regarding sales load variations by making a filing under Rule 497 and later including the disclosure in its next Rule 485(b) filing (thus avoiding the need for a second registration statement amendment, in addition to the annual update, in the same year), assuming that the fund would not have otherwise needed to amend its registration statement prior to implementing sales load variations. This option is not available for funds that are offering a new share class.
- Funds that choose to use a prospectus appendix to disclose sales load variations must disclose all variations for all share classes described in the prospectus in a single appendix. In other words, funds cannot use different appendices for different intermediaries and deliver to an investor only the appendix related to the investor's particular intermediary. Instead, the fund's prospectus must include a single, complete appendix.
- A variable annuity issuer may disclose sales load variations in an appendix to a variable annuity prospectus.
Template Filing Relief
The Staff explained that it generally would not grant template filing relief if a fund modifies the representations from the language set forth in the Guidance Update. Funds are directed to contact the Staff "[i]f exceptional circumstances require that the representations be modified." The representations include, among others, a statement that the disclosure changes in the template filing are substantially identical to disclosure changes that will be made in other filings.
In the CG Letter, the Staff expressed its view that the restrictions of Section 22(d) of the 1940 Act do not apply to a broker when the broker acts as an agent on behalf of its customers and charges its customers commissions for effecting transactions in "Clean Shares" of mutual funds. Clean Shares are a mutual fund share class "without any frontend load, deferred sales charge, or other asset-based fee for sales or distribution."
The FAQs explain that, to rely on the CG Letter, a fund should create a new Clean Share class, like any new share class, by making a filing under Rule 485(a), adding that a fund may seek template filing relief to add these classes to multiple funds within a fund complex. If a fund already offers a share class that meets the requirements of the CG Letter (such as an institutional class), the Staff advises that it does not believe a 485(a) filing is necessary solely to add the prospectus disclosure described in the CG Letter.
Finally, the FAQs advise that funds offering Clean Shares should include narrative fee table disclosure stating that investors may pay brokerage commissions on their transactions in Clean Shares.
The FAQs are available at: https://www.sec.gov/divisions/investment/guidance/frequently-asked-questions-mutual-fundfee-structures.htm.
The Guidance Update is available at: https://www.sec.gov/investment/im-guidance-2016-06.pdf, and the CG Letter is available at: https://www.sec.gov/divisions/investment/noaction/2017/capital-group-011117-22d.htm.