Frequently Asked Questions on IM Guidance Update 2016-06 (Mutual Fund Fee Structures)
Oct. 12, 2017
The staff of the Division of Investment Management has prepared the following responses to questions regarding IM Guidance Update 2016-06 (“IMGU 2016-06”) that relates to mutual fund fee structures. These FAQs also clarify disclosure matters associated with the staff’s recent interpretive letter to the Capital Group (Jan. 11, 2017) (“CG Letter”). These responses represent the views of the staff of the Division of Investment Management. They are not a rule, regulation, or statement of the Securities and Exchange Commission, and the Commission has neither approved nor disapproved this information. Unless stated otherwise, capitalized terms have the meaning given to them in IMGU 2016-06 or the CG Letter. IMGU 2016-06 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.
Variations in Sales Loads
1. Q. In order to implement sales load variations, IMGU 2016-06 states that a Fund will need to amend its registration statement by making a filing pursuant to rule 485(a) under the Securities Act of 1933. It states that registrants can, in certain circumstances, seek Template Filing Relief to make substantially identical changes to additional Funds through filings made pursuant to rule 485(b). Some Funds that have received Template Filing Relief, however, will not be required to file an annual update to their registration statement prior to implementing sales load variations, and thus may be required to file two registration statement amendments in the same year. Can such a Fund include disclosure regarding sales load variations by making a filing under rule 497 and later include the disclosure in its next rule 485(b) filing?
A. Yes. In this limited circumstance, the staff will not object if such a Fund that has received Template Filing Relief and whose disclosure is consistent with the conditions of that relief implements scheduled variations by making a filing under rule 497, followed by a rule 485 filing. This option is limited to Funds that are implementing sales load variations, that have received Template Filing Relief, and that would not have otherwise needed to amend their registration statements prior to implementing sales load variations. This option is not available for Funds that are offering a new share class.
2. Q. Can a Fund use different appendices for different Intermediaries and deliver to an investor only the appendix related to the investor’s particular Intermediary?
A. No. For Funds that choose to use an appendix to disclose sales load variations, all sales load variations for all share classes described in the prospectus must be disclosed in a single appendix. For purposes of any prospectus delivery obligation, the statutory prospectus must include the complete appendix to that prospectus.
3. Q. Can a variable annuity issuer disclose variations in sales loads in an appendix to the variable annuity prospectus?
A. Yes. Form N-4, the registration form for variable annuities, does not prevent a variable annuity issuer from disclosing sales load variations in an appendix to the prospectus. If a variable annuity issuer uses an appendix, it should follow the same disclosure and procedural requirements described in IMGU 2016-06.
Template Filing Relief
4. Q. Can a Fund modify the Template Filing Relief representations from the language prescribed in IMGU 2016-06?
A. Generally, no. The staff generally will not grant Template Filing Relief in circumstances where a Fund has modified the representations that are prescribed in IMGU 2016-06. If exceptional circumstances require that the representations be modified, please contact the staff member responsible for reviewing the Fund’s disclosures.
5. Q. The CG Letter describes an arrangement where a broker acts as agent on behalf of its customers and charges its customers commissions for effecting transactions in Clean Shares of a Fund. What Fund filings are necessary to establish such an arrangement?
A. A Fund may create a new Clean Share to rely on the CG Letter. Funds should create these new Clean Shares, like any new share class, by making a filing under rule 485(a). 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), we do not believe it is necessary to make a filing under rule 485(a) solely to add the prospectus disclosure described in the CG Letter.
6. Q. Should Funds offering Clean Shares include narrative fee table disclosure stating that investors may pay brokerage commissions on their transactions in Clean Shares?
A. Yes. One of the representations in the CG Letter is that the Fund must disclose in its prospectus that an investor transacting in Clean Shares may be required to pay a commission to a broker. As with disclosure for exchange-traded funds, which similarly may be sold subject to a commission charged by a broker, the discussion of commissions that may be payable to a broker should be disclosed in the narrative preceding the fee table. See instruction 1(e)(i) of item 3 of Form N-1A.