In an interpretive letter dated January 11, 2017 (the “Staff Letter”), the Office of Chief Counsel of the Division of Investment Management stated its view that, under certain circumstances the restrictions of Section 22(d) of the Investment Company Act of 1940, as amended (the “1940 Act”), do not apply to a broker when the broker acts as agent on behalf of its customers and charges 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 Staff Letter also confirmed that Section 22(d) does not prohibit a principal underwriter of Clean Shares from entering into a selling agreement with a broker under such circumstances. Further, the Staff added that this view was not dependent on whether the broker sells Clean Shares to investors in retirement accounts or non-retirement accounts.
Under Section 22(d) of the 1940 Act, a fund is prohibited from selling its securities except at the current public offering price that is described in the fund’s prospectus to any person, except to or through a principal underwriter for distribution. Section 22(d) also provides that if a class of security is being currently offered to the public by or through an underwriter, then no principal underwriter of that security, and no dealer, shall sell any such security to any person except a dealer, principal underwriter or the issuer, except at a current public offering price described in the fund’s prospectus.
Although the terms used in the Section 22(d) restrictions apply to “dealers,” they do not apply to “brokers.” Nonetheless, there has been uncertainty about whether a broker would be deemed a dealer (and thus make the restrictions applicable) if the broker charged a commission for effecting transactions of Clean Shares. The Staff Letter indicates that the restrictions would not apply in this situation.