SEC Staff Issues Guidance on Differential Advisory Fee Waivers

The SEC Division of Investment Management ("staff") issued guidance on mutual funds' obligations under ICA Section 18 ("Capital structure of investment companies") and ICA Rule 18f-3 ("Multiple class companies") as to the use of fee waiver and expense reimbursement arrangements that result in differing advisory fees for different share classes of the same fund.

SEC staff said that waivers that are "long-term or permanent, or effectively long-term or permanent, and are not substantiated with a clearly defined temporal purpose" create potential cross-subsidization between mutual fund classes, in violation of Rule 18f-3. Staff said that a mutual fund, in consultation with its board and counsel, must determine on a case-by-case basis whether a differential advisory fee waiver presents a prohibited means of cross-subsidization. Staff encouraged mutual funds that already have differential advisory fee waivers in place to assess whether such waivers create cross-subsidization, and to implement controls to prevent that possibility. SEC staff also encouraged mutual funds to disclose efforts to prevent cross-subsidization to investors.