The Department of Labor, in a recently released set of frequently asked questions related to its fiduciary rule, gave an endorsement of sorts to clean shares, saying the new mutual-fund share class represents one of the "most promising responses" to have emerged since the retirement regulation was issued last year.
While alluding to "other innovations," clean shares are the only product the DOL explicitly calls out in the FAQs as an "innovative" development.
"Assuming the compensation is reasonable, such an approach is a potentially powerful means of reducing conflicts of interest with respect to mutual fund recommendations and correspondingly reducing the need for heightened surveillance around adviser conflicts of interest," the DOL said of clean shares.
"I think it is kind of an endorsement, if I read between the lines," Charles Field, co-chair of the financial services practice at Sanford Heisler Sharp, said of the DOL's discussion on clean shares. "I think what they're saying is if you're going to offer clean shares, and provided you're not charging a large commission, these are going to be in compliance with the DOL fiduciary-duty rule."
Observers of the brokerage and asset management industries have cited clean shares as an early front-runner among other mutual fund products in the wake of the fiduciary rule, which raises investment-advice standards in retirement accounts such as 401(k)s and IRAs. The initial phase of the rule's implementation will begin June 9.
The funds strip away any distribution costs and allow advisers to assess a separate fee for their services. That lets broker-dealers charge the same advice fee on all mutual funds, eliminating the perception of adviser compensation guiding the ultimate fund selection.
American Funds, Janus and Columbia Threadneedle are the only companies to issue clean shares so far. But Morningstar, in a recent report, said other fund companies are planning to launch them, too.
"I think certainly the folks out there that have already been going in that direction will continue, and I think they'd view it as a pretty clear signal what they're doing will be viewed favorably by the Labor Department," said Charles Humphrey, principal of an eponymous law firm and a former attorney for the DOL and Internal Revenue Service.
RETIREMENT PLAN SHARES
R6 shares are an equivalent fund structure in the retirement-plan marketplace. Such funds, which unbundle revenue sharing fees such as 12b-1 fees from their investment cost, have become more popular over the past several years as plan sponsors have grown more cost-conscious and sought more pricing transparency, especially as 401(k) fee litigation has proliferated.
Observers also expect R6 funds to swell in popularity among retirement plan advisers due to the fiduciary rule.
"I think a lot of people view clean shares as, I wouldn't say a cure-all, but an approach that gives them a lot of flexibility," said Jeffrey Lieberman, counsel at Skadden, Arps, Slate, Meagher & Flom.
Asset managers have also debuted T shares, which charge the same commission — often 2.5% upfront — for all asset classes, as a response to the fiduciary rule. However, observers expect clean shares to trump T shares in long-term popularity.
(More: The truth about T shares)
The DOL's newly released FAQs discuss the transitionary period occurring between June 9 and Jan. 1, 2018, which is when all of the rule's provisions are scheduled to come into effect. President Donald J. Trump has ordered the DOL to review the rule, leaving open the possibility for revision ahead of that date.
The DOL, in its recent FAQs, hints at a potential concept for revision relying on clean shares. It suggests that creating a "new streamlined exemption based upon the use of clean shares and other innovations" may make it possible for firms to "create a compliance mechanism that is less costly and more effective than the sorts of interim measures that they might otherwise use."
SO LONG, BICE?
The DOL may be alluding to stripping the best-interest contract exemption, a provision of the rule the industry views as particularly onerous, of its present conditions in place of something "less administratively difficult" if a brokerage uses clean shares with clients, Mr. Humphrey said, qualifying this explanation as an educated guess.
"Maybe the Labor Department sees clean shares as an effective means of reducing the compliance burden of BICE, and achieving the objective of giving plans best-interest advice," he said.