Mutual Fund Sales by Intermediaries – Fall-Out from DOL Fiduciary Rule and FINRA Enforcement

Mutual fund sales and distribution arrangements are once again under review in the U.S. It has been reported that fund intermediaries are re-examining their practices relating to sales charges, share class structures and product offerings, in response to several Financial Industry Regulatory Authority (FINRA) enforcement proceedings in recent years involving the alleged misapplication of mutual fund sales charges, as well as to the new and amended fiduciary “investment advice” regulations issued in April 2016 (Fiduciary Rule) by the Department of Labor (DOL) under the Employee Retirement Income Security Act of 1974. As the mutual fund industry continues to evaluate the plans and proposals that may be advanced by intermediaries in light of these developments, it is important to be mindful of potential business, legal and regulatory implications, each of which presents distinct challenges.

This OnPoint summarizes recent enforcement and regulatory developments thought to be primarily responsible for this re-examination, as well as responses that are reportedly being proposed or considered by intermediaries with respect to mutual fund sales charges and share class structures. In addition, this OnPoint provides an overview of the legal and regulatory background of mutual fund sales charges and share class structures under the Investment Company Act of 1940 (1940 Act) and highlights certain potential implications that the mutual fund industry may wish to consider in navigating these anticipated proposals. This OnPoint is not intended to provide a complete summary of considerations that may apply to all mutual funds, but rather highlights certain issues under the 1940 Act that may be relevant to the mutual fund industry and intermediaries, as well as certain possible regulatory responses to these developments.

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