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October 02, 2017 at 05:38 AM
While the Labor Department has said it plans to propose a new, streamlined exemption as part of its revised fiduciary rule built around “recent innovations” in the financial services area, namely “clean shares,” Morningstar warns that Labor “must get the details around promoting and defining these shares.”
The development of clean shares — first came T shares (or “transactional” shares) and then share class Z, or “clean” shares — are in direct response to Labor’s fiduciary rule, Aron Szapiro, director of policy research at Morningstar, said on a recent webcast, but Labor “needs to understand this is a new idea, and we are still coming to a consensus on what clean shares mean.”
These “clean” share classes, Szapiro said, “have a different structure” than typical mutual fund share classes, and the innovation “won’t stop there. Broker-dealers will fine-tune the solutions.”
Regulators, Szapiro continued, “are really interested in clean shares, [and are] trying to figure out what they are and what they intend to solve.”
As he pointed out during the webcast, unlike other share classes, clean share “payments are direct — from investor to the provider of advice, rather than indirectly through the expense structure of the fund.”
He added in a recent blog post that “regulators generally agree that clean shares will not have front-end loads or 12b-1 fees, which are those used to pay for a mutual fund’s distribution costs.”
At the start of 2017, interest in clean shares surged as broker-dealers and advisors considered “offering a new share class that would have commissions that the broker could charge directly to the customer,” Szapiro wrote. Then on Jan. 11, the Securities and Exchange Commission opined that mutual funds could offer clean shares under an arcane part of the 1940 Investment Company Act, known as Section 22(d).
“This was just the beginning of a discussion that the industry — asset managers, broker-dealers, financial advisors and others — are now having about how to define clean shares,” Szapiro wrote.
