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SEC Signs Off on Clean Share Proposal

SEC guidance allows brokers to set commissions for selling shares cleansed of distribution charges and enables investors to better compare costs.

On Jan. 11, 2017, the SEC approved what Capital Group hopes is a way forward for both brokers and investors. The regulator said brokers can set their own commissions for selling clean shares, which include management fees and administrative charges but no distribution costs. That should give investors a better idea of what they’re paying to brokers and asset managers for their respective services. They’ll also be able to better compare the investment-related charges for clean shares of actively managed open-end mutual funds with exchange-traded funds.

Investors who seek financial advice should have more options. They’ll be able to weigh the relative costs of fee-based versus commission-based accounts. As John Rekenthaler recently pointed out, the T shares newly launched by many asset managers, which carry a 2.5% load and an ongoing 0.25% 12b-1 fee, have lower sales charges than a 1% asset-based advisory charge when held for at least four years, and they become cheaper the longer they are held. Capital Group thinks investors will be even better served by the complete separation of distribution and investment charges. With the SEC’s guidance, financial advisors who opt for a brokerage model can now set their own commissions and choose to compete on cost, service, or some combination of the two. Beginning in 2017’s first quarter, Capital Group will offer F-3 shares those advisors can use. Unlike T shares, F-3 shares are clean because they carry no distribution-related charges.

The addition of T and F-3 shares is another indication that the Department of Labor’s fiduciary rule is reshaping the landscape of mutual fund distribution. Set to go into effect starting in April 2017, the rule places a higher investment-recommendation standard on tax-qualified retirement accounts. The rule is likely to lead to the application of fiduciarylike obligations to taxable accounts as well. It has been widely expected that the rule will accelerate the shift from commission-based to fee-based accounts. With the SEC’s recent guidance, that could change.

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Alec Lucas

Director of Manager Research
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Alec Lucas is director of manager research, active funds research, for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is a voting member of the Morningstar Medalist Ratings Committee for U.S. and international fixed-income strategies, covers fixed-income strategies from asset managers such as Baird and American Funds.

Lucas is also active in parent research. He is a voting member of the U.S. parent ratings committee and previously served as the lead analyst for Franklin Templeton, Capital Group, and Vanguard, among other firms.

Lucas was a strategist on Morningstar's equity strategies team prior to assuming his current role in June 2022. He covered equity strategies from asset managers such as Primecap and American Funds and received the 2019 Citywire Professional Buyer Rising Star Award.

Before joining Morningstar in 2013, Lucas worked as a minister as well as a professor for Loyola University Chicago, among other institutions. From 2010 to 2011, he was a Fulbright Scholar at the University of Heidelberg.

Lucas holds bachelor's degrees in philosophy and classics from the University of Missouri-Columbia, where he graduated summa cum laude and with departmental honors, and a Master of Divinity, summa cum laude, from Trinity International University. He also holds a doctorate in theology, with distinction, from Loyola University Chicago and has published several articles and one book within that field.

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