Category: Regulations

14
Feb

DOL Readiness Guide

At the time of this writing, the compliance date for several provisions of the Department of Labor’s (“DOL”) fiduciary rule is still scheduled for April 10, 2017. Barring any delays, the day is poised to usher in many changes for the mutual fund industry.

As comprehensive and engaged partners, The Gemini Companies are providing investment managers to 1940 Act Mutual Funds with general share class guidelines to consider as they review the potential impact that the new DOL fiduciary rule may have on their businesses.

STREAMLINING SHARE CLASSES

The fiduciary rule is expected to expedite the industry shift from commission-based products to fee-based solutions offered through intermediaries—a swing that has been apparent since the financial crisis of 2008. In fact, a handful of distributors, including Merrill Lynch and Commonwealth Financial, have already announced plans to eliminate commission-based products.

Halting these types of products will make it easier for investment managers to market their funds to investors because fee-based products consist of generally less expensive and more transparent, share classes. Share classes that are expected to win assets include:

  • Institutional (Class I or Y): This is the preferred share class for large-asset accounts because institutional shares do not have sales charges or ongoing 12b-1 fees, and tend to have higher minimums.
  • Investor (Class N): This share class is most often offered through intermediaries, which may assess 12b-1 fees for shareholder services and do not have front- or back-end sales charges.
  • Class A: This share class includes shares that have higher front-end sales charges with ongoing 12b-1 fees, and have been utilized for asset-based accounts.  If the shares are expected to be sold within one year, Class A shares could serve as substitutes for Class C shares that have back-end load charges. Class A shares that waive their front-end sales charge may also be effective.
  • Class T:  This share class includes shares that have lower front-end sales charges with ongoing 12b-1 fees may be considered as a lower cost solution to traditional C and A shares. This is a relatively new share class structure that has garnered a lot of attention in light of the new DOL fiduciary rule.
  • Class R: These shares are generally only purchased through 401(k) and other employer-sponsored plans, and do not carry front-end or back-end charges. However, operating expenses among this share class may vary greatly among fund families.

These share classes are likely to attract future investments because they are easier to understand, more reasonably priced, and have simplified fee structures. The current share class “alphabet soup” causes much confusion among investors. The fiduciary rule is poised to streamline share classes through its push toward fee-based products. This would greatly benefit investors who would be able to choose from more products composed of the above-mentioned share classes.

NEXT STEPS

Investment managers should review their existing share class lineup to determine potential impacts and if an update to their current share class lineup is in order to stay ahead of this trend. Offering products with more transparent and cost-efficient share classes may enhance managers’ credibility by giving them the opportunity to showcase their cost-conscious funds in a highly competitive market.

dol-readiness-guide-chart-1

SHARE CLASS OPTIONS

Investment managers who determine that an adjustment is needed to their share class lineup have two share class options to consider: Create a New Share Class or Convert an Existing Share Class.

Each of these options require a team of experts to assist with a variety of tasks which include, but are not limited to:

  • Updating Registration Statement
  • SEC filing
  • Fund Board approval
  • Revised contract execution
  • Unwinding or converting a share class, if applicable
  • Blue Sky registration
  • Intermediary communication
  • Repapering of Selling Agreements

Option 1 – Creating a New Share Class

Action Items Fund Partner Timeline
Prepare and file updated Registration Statement with the SEC Gemini Fund Services Legal Team

·         Provides brief legal overview

·         Prepares updated filing for review by advisor and counsel

Manager

·         Reviews filing and provides comments or approval to file

Fund Counsel

  • Reviews filing and provides comments or approval to file
  • Receives comments (if any) from SEC approximately 45 days after initial filing
  • Updates revised Registration Statement to reflect SEC comments

 

One week to prepare filing, and then 60-day SEC review of filing
Fund Board approval Gemini Fund Services Legal Team

·         Schedules matter for Board consideration during next quarterly Board meeting; an in-person meeting is required for changes to a fund’s 12b-1 plan

·         Prepares updates to fund agreements (12b-1 plan, expense limitation agreement, etc.) and coordinates contract execution after Board approval is obtained

Boards typically meet at least once every three months
Blue Sky registration

 

Gemini Fund Services Treasury Team

·         To add a new share class for existing funds

·         For restructure/reclassification, the team sends notification to Blue Sky vendor for amendment of reclassification

10 business days from effective date
CUSIP and ticker changes

 

Gemini Fund Services Fund Administration Team

·         Submits CUSIP and ticker request

Up to 7 days from Board Approval

 

Option 2 – Restructuring an Existing Share Class

Action Items Fund Partner Timeline
Prepare and file Prospectus supplement or revised Prospectus with the SEC Gemini Fund Services Legal Team

·         Provides brief legal overview

·         Prepares updated filing for review by manager and counsel

Manager

·         Reviews filing and provides comments or approval to file

Fund Counsel

  • Reviews filing and provides comments or approval to file

 

One week to prepare filing, which is effective upon submission to the SEC via EDGAR[1]
Fund Board approval Gemini Fund Services Legal Team

·         Schedules matter for Board consideration during next quarterly Board meeting; an in-person meeting is required for changes to a fund’s 12b-1 plan

·         Prepares updates to fund agreements (12b-1 plan, expense limitation agreement, etc.) and coordinates contract execution after Board approval is obtained

Boards typically meet at least once every three months
Blue Sky registration

 

Gemini Fund Services Treasury Team

·         To add a new share class for existing funds

·         For restructure/reclassification, the team sends notification to Blue Sky vendor for amendment of reclassification

10 business days from effective date
CUSIP and ticker changes

 

Gemini Fund Services Fund Administration Team

·         Submits CUSIP and ticker changes

Up to seven days for ticker changes

Up to two days for CUSIP changes

[1] Board approval may be required before a Prospectus supplement or revised Prospectus can be filed with the SEC.  Gemini’s Legal Team shall consult with fund counsel on a case-by-case basis to determine the appropriate course of action based on the proposed share class changes. 

Additional costs* to consider when starting or restructuring a fund:

·         Outside counsel fees

·         EDGAR filing fees

·         Prospectus changes

·         Printing fees

·         Intermediary distribution fees

·         Outside counsel (provides finalized brief and filing)

·         Intermediary platforms (selling agreement changes)

 

*Some cost may be considered a fund expense.

SUMMARY OF ACTIONS

Action SEC Filing Board Approval Blue Sky Registration Prospectus Changes CUSIP & Ticker Changes Proxy Vote
Create No
Restructure No

7147 GFS-2/13/2017