The Staff concluded by encouraging boards of funds that already have differential advisory fee waivers in place to consider whether such waivers constitute cross-subsidization, whether appropriate steps are being taken to monitor such waivers to guard against cross-subsidization, and whether alternative fee arrangements may be appropriate. The Staff suggested that the board of a fund operating within a fund-of-funds structure could conclude that a long-term advisory fee waiver for one class of shares, but not for other classes of shares, does not constitute cross-subsidization if (i) shareholders in the waived class pay fees to the adviser at the investing fund level and (ii) such fees, when added to the advisory fees paid by the waived class, after giving effect to the waiver, are at least equal to the amount of advisory fees paid by the other classes. The Staff noted that whether a differential advisory fee waiver presents a prohibited means of cross-subsidization between classes is a facts-and-circumstances determination that a fund’s board, in consultation with the adviser and counsel, should make and document after considering all relevant factors. The Staff highlighted that differential advisory fee waivers that are long-term or permanent, or effectively long-term or permanent, could constitute prohibited cross-subsidization between classes. The Staff explained that, although the Rule expressly allows expenses to be waived or reimbursed by a fund’s adviser, the SEC did not intend such arrangements to become “ de facto modifications of the fees provided for in advisory or other contracts so as to provide a means for cross-subsidization between classes.” The Staff emphasized that advisory fees charged to shareholders of all classes of a mutual fund should generally be the same percentage amount. Among other things, the Rule requires class voting for certain matters, and fund board approval for a plan setting forth the separate arrangement and expense allocation for each class based on a finding that the plan is in the best interests of each class individually and of the fund as a whole. Rule 18f-3 (the Rule) of the Investment Company Act of 1940 (the Investment Company Act) provides an exemption to allow open-end funds to issue multiple classes of shares, which would otherwise be prohibited under Sections 18(f)(1) and 18(i) of the Investment Company Act. On February 2, 2023, the Securities and Exchange Commission (SEC) Division of Investment Management staff (the Staff) issued a bulletin to remind mutual funds and their boards of directors about the potential implications of fee waiver and expense reimbursement arrangements that result in different advisory fees being charged to different share classes of the same fund (differential advisory fee waivers). Rules and regulations SEC Division of Investment Management issues guidance on registered funds and differential advisory fee waivers
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