New Class of Mutual Fund Shares in Limbo as 'Fiduciary' Rule Is Delayed

By Michael Wursthorn and Sarah Krouse

The delay of a rule that tightens standards on brokerages' retirement-savings advice is disrupting efforts to roll out a new class of mutual-fund shares designed to comply with the regulation.

According to some brokerage firms familiar with fund managers' efforts surrounding these transaction or "T" shares, work to create them has been delayed or suspended while the Labor Department reviews the rule for repeal or revision.

The new fund shares would feature uniform sales charges across all fund categories to help eliminate any pay incentive that might cause a broker to recommend a higher-cost fund over a less-expensive similar option in potential violation of the Labor Department's "fiduciary" rule.

That rule -- which requires advice and sales recommendations in retirement accounts to be in savers' best interest -- was scheduled to go into effect April 10, but has been delayed for 60 days beyond that following an order by the Trump administration to conduct a review of its economic impact on business and investors. The rule was expected to make sales fees on some mutual funds, known as sales loads, and some funds' differing share-class prices problematic for brokerage accounts that charge investors for each transaction made.

Now, brokerages that were going to offer the new shares are being forced to re-evaluate their plans as fund companies halt their efforts to develop them, people familiar with the matter said.

Morgan Stanley's wealth-management arm recently told some employees that many fund companies have "delayed or suspended their efforts" to develop T shares following the retirement rule's delay, according to a memorandum viewed by The Wall Street Journal.

"While Morgan Stanley had obtained commitments from the majority of fund families to develop a class T share within our requested timeline, we no longer believe that timeline is realistic," the memo said, adding that the firm no longer expected to offer T shares next month.

The brokerage arm of Wells Fargo & Co., meanwhile, has been in contact with fund companies and hasn't made a final decision on whether it will be able to offer T shares of some mutual funds next month, people familiar with the matter said.

Fund companies that have already sought regulatory approval to offer T shares aren't likely to withdraw those requests, people familiar with their formation say. Instead, the fund firms are expected to wait and see how the review plays out before deciding whether to proceed with the T shares' development.

The fiduciary rule, finalized by the Labor Department under President Barack Obama last year, sought to address the potential for conflict in advice from brokers, including sales commissions and other fees charged by funds that could encourage brokers to sell one fund over another. The Obama administration had said such conflicts cost investors $17 billion a year.

Many in the financial industry say the Obama administration's numbers are inflated and the regulation would pare back investment options, pass along compliance and related costs to savers, and potentially cut off low-balance customers from some forms of professional advice.

In response to the rule, many mutual-fund companies sought to design new mutual-fund shares with uniform charges across all fund categories so brokerages could continue to sell their products to commission-paying retirement savers. Typically, T shares would charge a 2.5% load, or fee, when sold, and a so-called 12b-1 fee of 0.25% to pay for distribution or other expenses, according to researcher Morningstar Inc. In comparison, the load on an A share class could be 3.75% or more, according to Morningstar.

Nuveen Investments is among the fund companies that filed plans with regulators to launch T shares while Janus Capital Group filed plans for similar P shares. Spokeswomen for the firms declined to comment.

"Regardless of the technical issues, I'd argue it's short-sighted for either broker-dealers or asset managers to abandon T-share efforts simply over uncertainty regarding the Labor Department's fiduciary rule, " said Ben Phillips, principal at Casey Quirk, a Deloitte Consulting LLP practice focused on the asset-management industry, in an email. He added that customer pressure on costs and transparency remains.

Lord, Abbett & Co. LLC, another fund firm that has applied for new share classes is "moving forward" with those efforts as it awaits "greater clarity" on the rule, a firm spokesman said.

--Daisy Maxey contributed to this article.

(END) Dow Jones Newswires

March 05, 2017 13:08 ET (18:08 GMT)

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