The last several years have demonstrated an ongoing focus on transparency driven by guidance and rules from the governing bodies of the mutual fund industry. To date, most transparency initiatives have focused on Dealer to consumer transparency (404a and 408b2) and Dealer to Fund transparency that support a myriad of requirements from “Distribution in Guise” prospectus rule compliance including Rule 22c-2. The Department of Labor proposal reveals a new requirement on the horizon for increasing dealer transparency into the DOL’s fee and fiduciary requirements. So why has this become of interest to the DOL now? To understand this drive requires looking at the dealer infrastructure. Read more
The phrase, “knowledge is power,” takes on a special meaning when a paucity of knowledge leads to potential issues that leave a company fumbling around in a dark room, looking for a black cat, only to be saved when someone turns the lights back on. When Mutual Funds companies’ clients started moving away from trading in fully disclosed accounts to consolidated omnibus accounts, they lost their ability to monitor their fund trade activity. Compliance with prospectus defined rules became impossible to monitor and data became the black cat in the black room. However, due to market demand for more than summarized trade activity, transparency has reemerged within omnibus accounts. How this happened, who it impacted and what has been done to remediate the problem is the focus of this week’s journey into the fund industry’s Twilight Zone. Read more
In the last couple of years, FINRA has been taking a hard look at brokers that have been selling A shares to retirement plans to make sure they were waiving the load, if the fund allowed such a waiver. Well, it turns out that a lot of brokers have been selling A shares into retirement plans at POP (Public Offering Price), that is, the participants in the plan paid a front end load when the fund’s prospectus allowed those shares to be sold with no load. What’s the result of this activity? A FINRA investigation into broker dealer firms. So why is this happening now? Let’s take a step back and examine the players in this party. Read more
Burton’s Blog: SEC, Dodd Frank, Money Market Reform and FSOC: Connecting the Dots between the Acronyms
The Money Market Reform (MMR) rules being enacted by the SEC have left me feeling a little like we have a cure that is worse than the disease. The SEC generally does a fair job in weighing the costs versus the benefits of enacting regulations (I am stretching a little here) but this one just doesn’t feel right, so I decided to do a little research to see what made this rule change seem so different from prior SEC rule changes.
In part one of this post I opened the lid on the Pandora’s Box of mutual fund share classes (from A-Z, without U), currently floating around the industry; in part two we’ll examine why, beyond sheer confusion, this marketing practice is problematic.
Other than just being able to clearly identify the type of share class you are investing in, there are other issues with all multiple share classes. A lot of penalties have been imposed on firms by the SEC and FINRA for utilizing the wrong share class, either in retirement plans or Wrap accounts. With all the share class options available, is it any wonder they are being utilized improperly, either by design or by accident? Let’s look at some of the issues around using the wrong share class. Read more
What’s The Matter with U: “U” is absent in the current offering of 375 Mutual Fund Share Class names
Personally, I don’t like going to a restaurant where the menu just goes on and on, making me wonder if they can really prepare all those selections equally well! I also have a problem with mutual fund share classes, on a number of levels. Like certain restaurant menus, they are endless.
I recently looked at a common mutual fund industry database and found over 375 share class names. Back in the old days you had A, B and C shares. Today you’ve got share classes named after every letter in the alphabet, except the letter U. The letter R appears to be very popular, like appetizers; you can have an R, R1, R2, R3, R4, R5 or R6 share class. Looking for a main course? The names include some nice descriptive examples such as Ultra, Select, Retail, Prime, Premier, Direct, Classic, VIP and hundreds more. I am left to ponder, is U like monkey brains: something found in movies, but not on real menus? And why do we need all these names in the first place?
The long awaited result of the SEC’s distribution in guise sweeps hit today; you can find the link here. Many of the points covered were expected, and most of the requirements for compliance identified are currently supported by the Oversight platform Delta Data actually developed in anticipation of this guidance. Here is the overarching theme in this news: the 12b1 plan represents the only funds that can be used for distribution expense, and anything that promotes sales in any way, whether direct or indirect, must be allocated as an expense to the advisor and/or other relevant service providers, not the fund. Fees related to distribution in excess of the 12b1 plan must be allocated to the advisor and/or other relevant service providers.
Meeting the Needs of an Industry via Innovative Software Products: Mandates versus Evolution – Part 2
This is the second part of a two part posts concerning risks associated with developing new software products under two different scenarios: mandates and evolution. In the first part we discussed developing products due to mandates; in this second part we’ll explore developing products due to industry evolution. This discussion will be supported with examples of actual Delta Data Software products. Read more
Meeting the Needs of an Industry via Innovative Software Products: Mandates versus Evolution – Part 1
Much to her chagrin, I have told my wife many times that operating a software products company is like being a riverboat gambler. It is exciting, risky, and involves timing, industry savvy and a good relationship with Lady Luck (she hates it when I mention other women!) As a software product company focused 100% on the mutual fund and pooled products industry, Delta Data will generally see software development opportunities emerge in two distinct ways. First, there are the opportunities that present themselves as a result of mandated legislation. Then there are the opportunities that are discovered through an evolution within the industry itself. Each of the two opportunities has its pros and cons. To be successful, software companies need to recognize these opportunities and bring innovative products to the market faster and better than the bigger fish in the pond. Of course this innovation involves risk, hence the relationship with gambling. Read more
In my last blog article, I talked about how retirement plans had evolved from employer sponsored and employer run profit sharing plans into outsourced participant directed 401(k) plans. One of the big differences between the old profit sharing plans and today’s 401(k) plan that I did not get to mention in the last article is the use of employer stock in the retirement plan. Read more