SEC Issues Regulatory Bulletin on Fund Fee Waivers

The Securities and Exchange Commission Division of Investment Management recently issued a regulatory bulletin entitled, “Differential Advisory Fee Waivers.” The bulletin is meant to “remind mutual funds, their boards of directors/trustees and their legal counsel about the implications under the Investment Company Act of 1940 of fee waiver and expense reimbursement arrangements that result in different advisory fees being charged to different share classes of the same fund.”

The bulletin notes that many funds operate with multiple share classes and rely on Rule 18f-3 of the Investment Company Act which provides a limited exemption to permit an open-end fund to issue multiple classes of voting stock representing interests in the same portfolio. Specifically, Rule 18f-3(b) expressly allows expenses to be waived or reimbursed by the fund’s adviser, underwriter or any other provider of services to the fund. However, in the adoption of this Rule, the Commission notes these waivers were not meant to continue indefinitely and that it is the board’s duty to monitor the use of waivers.

The bulletin states specifically that differential advisory fee waivers present a means for cross-subsidization between classes in opposition to Rule 18f-3. The SEC staff encourages the mutual fund’s board to consult with management and legal counsel regarding documentation of the fee waiver. Enumerated items for the board to consider if there is a fee waiver in place, include:

  • Whether such waivers present a means for cross-subsidization
  • Whether the steps they are taking to monitor such waivers to guard against cross-subsidization are (and continue to be) effective
  • Whether alternative fee arrangements may be appropriate

It also provides questions for boards to consider if they are examining whether a fee waiver could be considered a prohibited means of cross-subsidization.