401(k) Specialist Issue 1 - 2018 - 32

FIDUCIARY
I
32
It's like a breaking news chyron on any of the cable channels, and
designed (successfully) for maximum attention:
" Investment Management Law Alert-Regulatory Focus on Share
Class Selection in 2018 "
The e-blast from The Wagner Law Group hit in-boxes in January,
and confirmed what 401(k) advisors, sponsors and product manufacturers
have long-known; share class confusion is an increasing
concern-and focus-of regulators.
While it might seem like an evergreen and
ongoing issue for the investment industry as
a whole (beginning with a B-share beatdown
over a decade ago), a new wrinkle in
the form of the fiduciary rule is adding a
frenzied air.
In recent years, the alert noted, the SEC's
Office of Compliance Inspections and Examinations
(OCIE) has increasingly scrutinized
share class selection by registered advisors.
" A share class recommendation must comport
with the requirements of Section 206 of
the Investment Advisors Act of 1940 to act
in the client's best interest and to seek best
execution for client transactions, " it read in
typical legalese. " Consistent with its 2016 examination
priority to protect retail investors,
OCIE launched its 2016 Share Class Initiative
to examine registered advisors' practices
related to share class recommendations and
compliance oversight of the process. "
Consumer protection continued to be a
priority for OCIE in 2017 and share class selection
appeared on its list of exam priorities
for 2018 as well. It's specifically concerned
about conflicts of interest with advisor
recommendations regarding share classes that
have higher loads or distribution fees.
" I think it's a direct result of the fiduciary
rule, " Wagner bluntly translated when asked
about the focus, and why it's happening
now. " I'm not saying people weren't talking
about different shares; B shares were beaten
up for a while and then A and C shares. I
think all of that was the beginning musical
score to the crescendo we're now seeing. "
Not surprisingly, the specter of the VoldeISSUE
1 2018 | 401kSpecialist.com
" I'm not saying people weren't
talking about different shares;
B shares were beaten up for a
while and then A and C shares.
I think all of that was the
beginning musical score to the
crescendo we're now seeing. "
mort-style villain (for some), tort lawyer
Jerry Schlichter, is raised any time fees and
fiduciary are mentioned together.
" I think you're seeing more lawsuits dealing
with this very issue; the appropriateness
of share classes, " Wagner adds.
And, as the aforementioned fiduciary rule
(officially the Conflict of Interest Rule) has
shown us over and over and over again, sea
changes within the investment industry, especially
large institutional changes, take time.
It's all a lot to digest, made more so with
the advent of so-called fiduciary shares, better
known as " T shares " and " clean shares. "
First, definitions are in order:
Clean shares (officially Z shares) are
stripped of front-end loads and 12b-1 fees,
which are generally used to pay for a fund's
distribution costs.
" Clean shares are exactly that, they're clean
and have no front-end load, deferred sales
charge, or other asset-based fee for sales or
distribution, " Wagner explains. " It's, 'What
does it cost to maintain the fund or investment
option?', and that's it. And then the
broker-dealer, RIA, recordkeeper or whomever
is going to distribute them, adds in their
charge directly for services rendered. "
More specifically, it's an investment
option whereby there are no additional
administrative expenses embedded in the
expense ratio.
" Therefore, it's very useful, for example,
in an open architecture type of an arrangement.
Recordkeeping fees can be layered on
by whatever financial institution, custodial
fees could be layered on, sub-transfer agency
fees can be layered on, distribution and
marketing fees can be layered on, things like
that. So basically, the expense is determined
ultimately by the financial institution. "
The directive is that it will not be as
much about mutual fund companies setting
the share price as it is the financial institution,
be it a broker-dealer, wirehouse or
someone else.
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401(k) Specialist Issue 1 - 2018

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