Division of Investment Management Provides FAQs on Mutual Fund Fee Structures

February 22, 2017

The staff of the Securities and Exchange Commission recently posted responses to frequently asked questions (“FAQs”) relating to its December 2016 IM Guidance Update 2016-06 (“Guidance Update”) and its January 11, 2017 no-action letter to the Capital Group (“Staff Letter”).  The FAQs cover questions on disclosure and filing requirements that fund companies may have following the issuance of the Guidance Update and Staff Letter.

The Guidance Update provided the Staff’s views as to certain disclosure issues and procedural requirements with respect to mutual fund fee structures following the adoption of the “fiduciary rule” by the Department of Labor (DOL), which is intended to address conflicts of interest in retirement advice. Following the adoption of the fiduciary rule, fund companies have considered changes in fund fee structures, including streamlining sales load structures, and the addition of new fund share classes that would facilitate compliance with the rule.

With respect to fund companies considering variations in sales loads, the FAQs provide that the Staff will not object if fund companies, for which Template Filing Relief has been provided, implement scheduled sales load variations by making filings under Rule 497 (rather than Rule 485(b)) under the Securities Act of 1933. This option is limited to those funds that have received Template Filing Relief and would not otherwise need to amend their registration statements prior to implementing the sales load variations. The option is not available to funds offering a new share class. The FAQs reiterate that a fund company should include, without modification, the Template Filing Relief representations prescribed in the Guidance Update in its request for relief.

The FAQs also clarify that if a fund includes an appendix to its prospectus disclosing sales load variations (as permitted under the Guidance Update), all variations for all classes described in the prospectus must be included in a single appendix, which must be provided with the statutory prospectus for purposes of any prospectus delivery obligation. A variable annuity issuer may also include such an appendix in its prospectus.

The Staff Letter provided the Staff’s view that, under certain circumstances, a broker may charge its customers commissions for effecting transactions in “Clean Shares” (i.e., a class of fund shares without any front-end load, deferred sales charge, or other asset-based fee for sales or distribution). The FAQs provide that a fund company may offer Clean Share classes meeting the requirements in the Staff Letter by making a filing under Rule 485(a) and requesting Template Filing Relief with respect to multiple funds in a fund complex. The FAQs state that funds offering a Clean Share class should include fee table narrative disclosure in their prospectuses providing that such shares may be subject to a commission charged by a broker. However, the FAQs clarify that a fund already offering a share class that meets the requirements of the Staff Letter would not need to file its prospectus under Rule 485(a) solely to add disclosure described in the Staff Letter.

See companion blog post titled “Division of Investment Management Provides Interpretive Guidance on Section 22(d) Restrictions” for further discussion of the Staff Letter.

Click here to access the FAQs.

Click here to access the Guidance Update.

Click here to access the Staff Letter.


Investment Companies, Mutual Funds