James V. Catano
Washington, D.C. +1 202 261 3376
Over the past two years, the mutual fund distribution and share class landscape has experienced considerable changes in light of several regulatory developments, notably the new and amended duciary “investment advice” regulations issued in April 2016 by the Department of Labor (“DOL”) under the Employee Retirement Income Security Act of 1974 (“ERISA”) and the Internal Revenue Code of 1986. Other regulatory pressures are also driving these changes, including the renewed examination and enforcement focus of the Securities and Exchange Commission (“SEC”) and Financial Industry Regulatory Authority (“FINRA”) on share class selections or recommendations made by financial advisers and broker-dealers and other salesrelated matters (e.g., the application of sales charge waivers). In addition, interpretive guidance published by the Sta of the SEC regarding “clean shares” and other share class matters has contributed to the broad registration of new share classes and in some cases the repurposing of existing share classes, as well as other product initiatives and changes in the distribution structure for mutual fund shares. However, considerable uncertainty remains as fund groups grapple with how best to position themselves in this new and evolving landscape, particularly as future regulatory changes in this context are anticipated by many in the industry, including a potential standard of conduct proposal by the SEC, as well as the possible elimination of the DOL duciary rule and its exemptions.
This outline provides an overview of the legal and regulatory background of certain mutual fund share class considerations and summarizes recent regulatory guidance and several disciplinary or enforcement proceedings relating to share class structures and sales and distribution arrangements for mutual funds. As the mutual fund industry continues to evaluate the ongoing impact of these developments on fund products and sales, it is important to be mindful of potential business, legal and regulatory implications, each of which presents distinct challenges.
Read "A Touch of Class: Mutual Fund Share Class Developments (Part 1)."