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SEC Guidance Update and the DOL’s Fiduciary Rule

In December, the Division of Investment Management of the Securities and Exchange Commission (“SEC”) issued Guidance Update No. 2016-06 (“Update”). The Update provides disclosure and procedural guidance to address potential issues for mutual funds (“Funds”) responding to the Department of Labor’s adoption of the Conflict of Interest Rule (“Rule”).

As explained in our “Who’s a Fiduciary Now” alert, the Rule (which will go into effect April 10, 2017, if not delayed by the Trump Administration) expands the number of investment-advice relationships that create fiduciary status under the Employee Retirement Income Security Act of 1974 (“ERISA”). If an ERISA fiduciary receives variable compensation for recommending certain investment products, the fiduciary may become subject to prohibited transaction rules. To address concerns by financial intermediaries that variations in mutual fund sales loads may cause them to violate the Rule, Funds are exploring various options, including changing fee structures and creating new share classes. These changes may impact fiduciary decisions regarding a plan’s investments and compensation arrangements.

As described below, the SEC’s Update is focused on streamlining the process for Funds to implement the new options they are proposing. The new options themselves are intended to lessen the likelihood that routine compensation arrangements with financial intermediaries will run afoul of the DOL’s Rule. As they seek to understand and advise their plan participants about these new Fund options, employers and plan-level fiduciaries can benefit from understanding the SEC’s guidance on the submission and review process.

Fee Structures

Fund shares sold through financial intermediaries may be subject to sales loads that are based on a percentage of the purchase price. As a result, share prices may reflect scheduled variations in sales loads which are disclosed in a Fund’s prospectus. Since the financial intermediary that sells the Fund shares is compensated out of the sales load proceeds, the financial intermediary may receive variable compensation, resulting in Rule violations if the financial intermediary is an ERISA fiduciary.

Rule 22d-1 under the Investment Company Act of 1940 permits a mutual fund to sell shares at scheduled variations subject to certain requirements, including disclosure of such arrangements. Therefore, Funds that create new sales load variations to assist financial intermediaries with Rule compliance must amend registration statements to disclose the new variations. Among other requirements, the Fund disclosure must:

  • Describe the arrangements resulting in breakpoints in, or elimination of, sales loads;
  • Identify each class of individuals or transactions to which the arrangements apply;
  • State each different breakpoint as a percentage of both the offering price and net amount invested;
  • Identify each intermediary whose investors receive a sales load variation; and
  • Present the information in a clear, concise, and understandable manner.

Given the potential for lengthy disclosures, the Update allows information about sales loads that differ by intermediary to be provided in an appendix to the prospectus if the following conditions are satisfied:

  • The section of the prospectus that describes sales loads applied to purchases of the Fund’s shares must include a prominent statement that different intermediaries may impose different sales loads, and that these variations are described in an appendix (with the specific appendix being named);
  • The narrative explanation to the fee table must cross-reference the appendix; and
  • The appendix must identify the intermediary and provide sufficient information so an investor can determine which scheduled variation applies to a specific purchase of Fund shares.

Alternatively, the Fund may use a stand-alone document for the appendix if:

  • The appendix is filed with the prospectus and incorporated into the prospectus by reference;
  • The appendix includes a legend on the front cover page explaining that the information in the appendix is part of, and incorporated in, the prospectus;
  • The prospectus includes a statement on the outside back cover that information about different sales load variations is provided in a separate document that is incorporated by reference into the prospectus;
  • The appendix is delivered with the prospectus; and
  • The appendix is posted on the Fund’s website if the Fund uses a summary prospectus.

New Share Classes

In the event a Fund decides to offer new share classes to help financial intermediaries comply with the Rule, the existing fund is required to file under Rule 485(a) of the Securities Act of 1933 (“Securities Act”). In the Update, the SEC staff reminds Funds that the staff focuses on disclosure of fund fees, performance and distribution arrangement when reviewing filings that add a new share class.

Selective Review and Template Filing Relief

The Update encourages Funds to seek selective review of filings and to consider requesting template filing relief under Rule 485(b)(1)(vii) of the Securities Act, if applicable, to create efficiencies in the review process.

The SEC staff also encourages Funds to request selective review of a filing that contains disclosure that is not substantially different from the disclosure contained in prior filings by the Fund or other funds in the complex. The Update reminds Funds that to request a selective review the filing should include a cover letter with the following information:

  • A statement whether the disclosure has been reviewed in another context;
  • A statement identifying prior filings that are similar to, or provide a precedent for, the current filing;
  • A summary of the material changes made in the current filing; and
  • Areas that warrant particular attention.

If a Fund makes substantially identical changes to multiple funds, the Update encourages the Fund to consider requesting template filing relief. To make such a request, the Fund would submit a single filing (i.e., a template filing) under Rule 485(a) of the Securities Act along with a request for the other funds with substantially identical disclosures. The request must contain the following representations and be filed on the EDGAR system:

  • The disclosure changes in the template filing are substantially identical to disclosure changes that will be made in the replicate filings;
  • The replicate filings will incorporate changes made to the disclosure included in the template filing to resolve any SEC staff comments; and
  • The replicate filings will not include any other material changes compared to the template filing that would render the replicate filings ineligible under Rule 485(b) of the Securities Act.

Any replicate filings under Rule 485(b) relying on template filing relief should include a cover letter or note explaining that it is relying on this relief.


While this guidance does not directly affect employers and plan-level fiduciaries, those fiduciaries have an obligation to understand the plan’s investments and compensation arrangements, as well as provide appropriate disclosures to plan participants. These fiduciaries may need to re-examine prior decisions regarding the plan’s investments, services and compensation arrangements if a Fund offered under the plan changes its fee structures or share classes in response to financial intermediary concerns regarding compliance with the DOL’s Conflict of Interest Rule.