SEC clarifies how funds should disclose fee changes to comply with DOL fiduciary rule

The agency's Division of Investment Management provides guidance on how to communicate changes to sales loads that level compensation for brokers

Jan 3, 2017 @ 1:58 pm

By Mark Schoeff Jr.

Mutual funds that modify their fees and offer new share classes to comply with a Department of Labor investment advice rule must clearly highlight the moves and can outline them in a prospectus appendix, according to the Securities and Exchange Commission.

The SEC's Division of Investment Management explained how funds should disclose changes to sales loads that level compensation for brokers.

“The disclosure should specifically identify each intermediary whose investors receive a sales load variation,” the SEC guidance released Dec. 15 states. “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. We would not object to an appendix that is a standalone document.”

The SEC directive will better illuminate fund fees for investors, according to Joanne Skerrett, counsel at the Mutual Fund Directors Forum.

“You can compare [fees] in a way you couldn't in the past,” Ms. Skerrett said. “It's great transparency for the shareholder to see that information.”

The DOL rule, which must be implemented by April 10, requires financial advisers to act in the best interests of their clients in retirement accounts.

In order to eliminate conflicts of interest, some brokers have decided to charge the same fee for all mutual funds, rather than having them differ by funds.

Prior to the rule, the sales load for funds could vary, posing a potential conflict for brokers who recommend the funds with the highest payout. Now, the loads may be set at different levels by brokers.

“They want the variations in the prospectus and they want the broker identified,” said Michael Doherty, a partner at Ropes & Gray. “It's helpful in the sense that fund groups have been hearing rumors of what the SEC staff is looking for, and this [guidance] gives them more certainty.”

The SEC also said that funds that offer “new share classes that differ with respect to sales loads, transaction charges and certain ongoing expenses” can file the change once to SEC staff for review, rather than submitting it for each fund in a complex.

“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,” Investment Company Institute general counsel David Blass said in a statement. “This guidance should help streamline that process and it answers some open interpretive questions.”

The fate of the DOL rule in the pending Trump administration is unclear. Republicans in Congress want to kill it, but many compliance experts say firms should proceed with implementation because the rule — or at least parts of it — could remain on the books.


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