SEC Offers Guidance on DOL Fiduciary Rule Compliance

The Securities and Exchange Commission (SEC) will not be in charge of applying the stricter conflict of interest standards being introduced for retirement plan advisers and the investment providers supplying them with products to sell, but many of its own rules and regulations will interact intimately with the Department of Labor rulemaking.

According to the SEC’s latest guidance, since the DOL rule’s proposition and finalization, representatives of mutual funds have been considering a variety of issues related to its implementation, including “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.”

SEC notes that some funds are 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. Thus, its guidance is focused on disclosure issues and certain procedural requirements with offering variations in fund sales loads and new fund share classes.

For example, the guidance reminds readers that, concerning variations in sales loads, a fund may sell shares at prices that reflect scheduled variations in, or elimination of, sales loads, as long as each sales load variation is disclosed in the prospectus.

“Under the Investment Company Act of 1940 and item 12(a)(2) of Form N-1A require that each variation be applied uniformly to particular classes of investors or transactions and disclosed in the prospectus with specificity,” the guidance explains. “We understand that funds 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). In these circumstances, item 12(a)(2) of Form N-1A requires that the prospectus: (1) briefly describe the arrangements that result in breakpoints in, or elimination of, sales loads; (2) identify each class of individuals or transactions to which the arrangements apply; and (3) state each different breakpoint as a percentage of both the offering price and net amount invested.”

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According to SEC, under this approach, investors who purchase through a designated intermediary would be a “class” under item 12(a)(2). Therefore, the disclosure should specifically identify each intermediary whose investors receive a sales load variation.

“This information must be presented in a clear, concise, and understandable manner, and should include tables, schedules, and charts where doing so would facilitate understanding,” the guidance states. “In addition, the narrative explanation to the fund fee table must alert investors to the existence of sales load discounts or waivers and provide a cross-reference to the section and page of the prospectus and statement of additional information that describes these arrangements.”

SEC acknowledges that some fund firms are concerned that if a provider creates multiple scheduled variations, it could lead to lengthy prospectus disclosure that may be difficult for an investor to navigate and comprehend. “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,” SEC says.

The guidance lays out a number of requirements fund firms and intermediaries must follow in order to use an appendix under this approach. These requirements may seem complicated but they are all constellated around doing the right thing, transparently, for investors.

Also covered are a series of questions firms are asking about the creation and distribution of new share classes. According to the SEC, many funds are considering offering new share classes that differ with respect to sales loads, transaction charges, and certain ongoing expenses.

“As with the scheduled variation procedures … adding a new class to an existing fund requires a filing under rule 485(a). When reviewing a rule 485(a) filing that adds a new share class, we focus on the disclosure of fund fees, performance, and distribution arrangements. If only certain disclosures about the fund are changing, such as to describe the new share class, we encourage funds to seek selective review of the filing as described below. Also, because share class specific information is often substantially identical across Funds within the same fund complex, funds should consider whether it is appropriate to request Template Filing Relief as described below.

The full guidance is available for download here.