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SEC Issues DOL Fiduciary Rule Guidance for Mutual Funds

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The Securities and Exchange Commission has released guidance to help mutual funds streamline the process of offering certain fee structures that are designed to achieve level compensation consistent with the Department of Labor’s fiduciary rule, which takes effect on April 10.

The seven-page guidance, issued by the Division of Investment Management in December, focuses on disclosure issues and certain procedural requirements with offering variations in mutual fund sales loads and new fund share classes.

David Blass, general counsel at the Investment Company Institute in Washington, told ThinkAdvisor in a Tuesday email that the SEC “will receive a large number of share class filings from funds offering variations in fund sales loads or new fund share classes in connection with the implementation of the DOL fiduciary rule.”

The SEC guidance “should help streamline that process, and it answers some open interpretive questions,” Blass said.

The SEC guidance explains that in light of DOL’s rule, funds have been contemplating certain changes to fund fee structures that would, in certain instances, level the compensation provided to a financial intermediary for the sale of fund shares by that intermediary and facilitate intermediaries’ compliance with the rule.

Funds have told the SEC that they are considering new variations to sales loads that would apply uniformly to investors that purchase fund shares through a single intermediary (or category of multiple intermediaries).

The guidance counsels that under these circumstances, a prospectus must: briefly describe the arrangements that result in breakpoints in, or elimination of, sales loads; identify each class of individuals or transactions to which the arrangements apply; and state each different breakpoint as a percentage of both the offering price and net amount invested.

The disclosure should “specifically identify each intermediary whose investors receive a sales load variation” and be presented “in a clear, concise and understandable manner, and should include tables, schedules, and charts where doing so would facilitate understanding.”

Some mutual funds are also considering streamlined sales load structures to simplify costs for investors and to help address operational and compliance challenges that can exist for intermediaries that sell shares of multiple funds, the SEC guidance points out.

Among concerns raised by mutual funds is that if a fund creates multiple scheduled variations, it could lead to lengthy prospectus disclosure that may be difficult for an investor to navigate and comprehend.

The SEC states in the guidance, however, that “given the Commission and staff focus on improving disclosure, we would not object if lengthy sales load variation disclosure for multiple intermediaries is included in an appendix to the statutory prospectus.”

As to funds offering new share classes that differ with respect to sales loads, transaction charges and certain ongoing expenses, the guidance explains what filings are needed, for instance, when adding a new class to an existing fund.

Fund companies are pursuing new “T” shares, or “transaction” shares, while others are issuing more traditional front load funds. The transaction share class has no set definition and can vary from fund to fund. Some mutual fund shops refer to T shares and mean a 2.5% load while others refer to T shares as a share class with a scheduled variation. T shares can also be referred to as institutional-type share classes with no payments at all to distributors. 


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