Compliance

SEC Offers Guidance on DOL Fiduciary Rule Compliance

Since the DOL conflict of interest rule’s publication, mutual fund providers and their adviser-intermediaries have also been asking the SEC extensive questions about sales loads, fee schedules, etc. 

By John Manganaro editors@assetinternational.com | December 30, 2016
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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.”

NEXT: More from the SEC guidance