In light of the upcoming DOL Rule, the SEC recently issued guidance to funds on disclosure issues and certain procedural requirements with offering variations in fund sales loads and new share classes. The SEC IM Guidance Update appears to be an attempt by the SEC to not only provide needed guidance to funds, but to also to alleviate for SEC staff what could become an avalanche of new filings.
There appears to be two primary initiatives being discussed by funds to help intermediaries that sell their funds with the operational and compliance challenges the DOL rule creates. These are (1) create sales loads variations that apply to various designated intermediaries and (2) adding new share classes that differ with respect to sales loads, transaction charges and on-going expenses. Both of these options would require new disclosure filings with the SEC. It should also be pointed out that the SEC in its Endnotes states that they cannot provide any assurances that any approach described in the Guidance will satisfy the requirements of the DOL rule.
Guidance for New Sales Load Variations
Funds are concerned that if a fund creates multiple scheduled variations, it could lead to lengthy prospectus disclosures that may be difficult for an investor to navigate and comprehend. The SEC has stated in this Guidance that it is OK for a fund to include these sales load variations for multiple intermediaries in an appendix to the statutory prospectus. The Guidance outlines the requirements for filing an appendix to the prospectus and then gives the funds a nice tip that could help reduce the filing load for both the funds as well as SEC staff. They suggest that if only certain disclosures about the fund are changing, that the fund seek a selective review of the filing. In addition, they state that if the sales load variation disclosures are substantially identical across multiple funds with the fund complex, the fund should consider requesting relief via a template filing under rule 485(b)(1)(vii).
Guidance for New Share Classes
Again, the SEC is stating that if only certain disclosures about the fund are changing such as describing a new share class, that the fund should seek selective review of the filing. And as with the guidance for new sales load variations, the SEC states that if the share class changes are substantially the same across funds within the fund complex, that the fund should consider whether it is appropriate to request Template Filing Relief.
It is apparent that there are going be thousands of post-effective amendment filings under Rule 485(a) prior to the April 10, 2017 effective date for the DOL rule. Since SEC staff must review every post-effective amendment under Rule 485(a), this Guidance will help funds prepare these filings in a more efficient manner while at the same time it will provide a more streamlined approach for the SEC staff to get through the thousands of filings expected to come their way soon.
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L. Burton Keller was a principal founder of the company in 1985 and currently focuses on strategic initiatives for the company. Mr. Keller is a former member of the Bank, Trust and Retirement Advisory Committee of the Investment Company Institute. He has served on numerous committees and task force groups with the ICI over the last 17 years including Co-chair of the Dividend Distribution Task Force.