A Guidance Update published in December 2016 by the SEC’s Division of Investment Management has sent funds scrambling to beef up prospectus disclosures to accommodate changes to fees charged by financial intermediaries before the Department of Labor’s (DOL) “conflicts of interest” rule kicks in on April 10, 2017.
The conflicts of interest rule, which the DOL finalized on April 8, 2016, generally subjects financial intermediaries (e.g., broker-dealers) that sell certain retirement products, including IRAs funded by mutual fund shares, to a fiduciary standard, rather than the “suitability” standard that now applies only to non-retirement accounts. To comply with the rule, broker-dealers must effectively level the compensation that funds pay them for the sale of fund shares. The financial intermediaries, in turn, have pressured funds to streamline the sales load structures of fund share classes. For example, financial intermediaries may require simplified costs and tailored sales charge waivers relating to specific classes of fund shares. In an effort to eliminate conflicts of interest, some intermediaries may decide to charge the same fee for all mutual funds, as opposed to different charges.
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