The Securities and Exchange Commission gave the green light Wednesday to the Capital Group to issue “clean shares” through its American Funds — a share class without any distribution costs, such as 12-b(1) fees.
The no-action letter to the management company of the American Funds will allow brokers to set their own commission on the shares, also known as F3 shares. In essence, the new shares will separate investment costs from distribution costs.
The SEC's letter was in response to a query from the Capital Group. In that letter, the company noted that the Department of Labor's fiduciary rules were causing funds to have difficulty in figuring out pricing for shares that would conform to the new rules. “Given that fund firms may not collaborate on pricing models due to concerns around antitrust violations, the industry is finding it difficult to coalesce around commission-based share class pricing structures that would work under the DOL Rule,” the fund group said in its letter.
Capital Group argued that its F3 shares would trade much like an exchange-traded fund, where brokers can set their own fees for transactions and services. “The proposed guidance would allow for a brokerage model where funds, ETFs, individual securities and other 'like' investment options could compete on returns and fees,” the fund company wrote. “The proposed model also preserves choice for investors who prefer to invest through a brokerage model and provides further transparency regarding the fees they pay and the associated services.”
The fund group asked for a narrowly tailored ruling from the SEC that would apply to Clean Shares. The SEC's letter stipulated that its ruling applied to CleanShares, given the proposed practices outlined in the Capital Group's query. Among those: Clean shares would have no distribution costs embedded in the share price, and that the fund's prospectus would have to disclose that the broker may charge a commission on the sale of the shares.
The new share classes, expected to debut later this quarter, will add to the American Funds' dizzying number of share classes. The company's largest fund, the American Funds Growth Fund of America (AGTHX), already has 18 share classes. The new clean shares may be cheaper for investors, depending on the fees their brokers add.
The clean shares will be the third commission-free share class offered by the American funds. F1 class removed the commission but kept trailing 12b-1 fees. F2 class shares removed the 12b-1 fee, but maintained the sub transfer agency fee.