On January 11, the SEC staff issued an interpretive letter to
the Capital Group (CG Letter) stating that Section 22(d) of the
Investment Company Act does not prevent brokers from charging
commissions for effecting transactions in so-called "clean
The CG Letter effectively allows brokers to compete on
commission rates for the sale of mutual funds, as they do for ETFs,
subject to certain conditions. The conditions of the CG Letter
the clean shares must not include any
form of distributionrelated payments to the broker;
the broker must represent in the
relevant selling agreement that it is acting solely on an agency
basis for the sale of clean shares;
the clean shares prospectus must
disclose (in the fee table) that brokers may charge a commission on
the sale of the shares and, if applicable, that other share classes
commissions collected by the broker
must be consistent with FINRA rules and other applicable law;
purchases and redemptions of clean
shares must be made at net asset value.
SEC Staff Answers to Frequent Questions
On February 15, the SEC staff published answers to certain
questions regarding the CG Letter. For example, a fund with an
institutional class would not be required to make a Rule 485(a)
filing to add required clean shares disclosure.
The CG Letter clearly states clean shares may not be sold with
sales loads or asset-based fees for sales or distribution. However,
the CG Letter does not address whether a selling broker may receive
service fees, such as sub-transfer agent or shareholder servicing
fees, or revenue sharing payments from the fund's adviser.
In addition, some have wondered whether the legal premise of the
CG Letter could be applied to the sale of variable insurance
contracts. One potential issue to consider is that brokers selling
variable insurance contracts may be deemed to be acting as agents
of the issuing life company.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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