Category: Blue Sky, Compliance, Industry Trends

Unintended Consequences: Impact of DOL Fiduciary Rule Preparations on 22c-2 and Blue Sky


Preparations for initial compliance with the DOL Fiduciary Rule are complicated by a compressed timeline and the uncertainty wrought by a proposed 60-day delay and 15-day public comment period. The Office of Management and Budget’s “economically significant” designation of the Rule combined with recent court activity and the concerns about the president’s nominee for the Secretary of Labor, make it far from certain that the Rule will be significantly amended or nullified before the April 10 applicability date.

So, we are generally seeing business-as-usual with preparations needed to comply. As you continue to proceed with your compliance strategy, we invite you to consider that for every decision and action you take, there could be ripple effects throughout your business, including your 22c-2 and blue sky programs.Adding and Closing Share Classes

We know many asset management firms are adding new share classes in their efforts to comply with the Fiduciary Rule. In fact, our Blue Sky Administration team is preparing for the addition of thousands of new permits before the initial implementation date. We also anticipate that, as the Rule plays out, there will be share classes that are ultimately terminated due to lack of compliance or financial viability.

Your DOL Fiduciary Rule decisions and actions might also affect your blue sky exemptions. For example, if you are introducing new, no-load share classes that do not have 12b-1 fees, you may be able to expand your sales to existing shareholder exemptions.

In addition, the timing and structure you choose for introducing new share classes might affect your notice filing fees. For example, if a state has a class filing requirement and an April 30 expiration, regardless of the date of initial filing, if you file a new DOL-compliant share class there before April 10, you may have to pay the notice filing fees a second time at the end of the month. Likewise, if you terminate a share class right after the start of a notice filing period, you could end up wasting money by paying the fee for a class that won’t be registered for the entire filing period.

If you want to avoid paying unnecessary fees, consult with your counsel and blue sky provider about the timing of your share class actions. They should be able to run financial impact analysis and make suggestions on when to take these actions to minimize unnecessary notice filing costs.

Moving Shareholders Between Share Classes

Another strategy firms are considering to address share class compliance is to move shareholders to different classes of shares.

Impact of Cross-Class Exchanges on 22c-2 Trade Monitoring: Consider collaborating with your broker/dealers regarding how to process and document cross-class exchanges to ensure DOL compliance. If your broker/dealers pass a cross-class exchange code with the daily sales activity (DSA) file, the transactions will be excluded from trade monitoring. If they don’t do this, it is likely the transactions will be defined as an exchange redemption/exchange purchase on the file. If this happens, these transactions will be included in trade monitoring analysis and could be flagged as a trading violation requiring an investigation.

Impact of Cross-Class Exchanges on Blue Sky: We recommend that you work with your fund counsel to determine whether exchanges from one share class to another should be considered blue sky reportable; this will affect your notice filing status. In our experience, many clients take the conservative approach of reporting share class exchanges and reviewing transactions if they impact a particular blue sky permit.

Cross-class exchanges might also impact your Sales to Existing Shareholder (SES) exemptions. One solution is to ask your blue sky team to analyze the potential impact of your proposed actions on your SES exemptions; this data could guide your decision making.

Managing Best Interest Contracts (BICs)

Commission structures are another target of change affecting 22c-2 trade monitoring. Many distributors who are uncomfortable with the requirements of the BIC are moving from commission-based IRAs to fee-based arrangements or wrap accounts. However, because there is currently no defined field on the DSA file indicating the presence of a wrap agreement, these transactions may be included in trade monitoring, which could result in trade monitoring thresholds being triggered, and the initiation of investigation.

Leveraging Existing Intermediary Oversight Data for Compliance Monitoring

Some clients have asked about using subaccount data to monitor whether recordkeeping distributors are putting retirement shareholders in the correct class of shares. One place to look could be the “account type” field in the DSA file. When the time comes, Boston Financial clients are invited to talk with their relationship managers about resources that may be available to support their monitoring activities.

Mitigating Unintended Consequences

The easiest way to mitigate the unintended consequences of your DOL Fiduciary Rule planning is to engage your compliance teams in your preparation. Evaluating your proposed product lineup and implementation timeline can help determine where there may be impact on each of these regulatory compliance initiatives. If Boston Financial provides 22c-2 trade monitoring and/or blue sky services, reach out to us sooner rather than later to talk about what you plan to do, so we can support your DOL compliance goals at the lowest cost possible to your firm.

Kevin Caravella and Kevin Cloonan also contributed to this post.

Kevin Caravella, Vice President of Blue Sky Administration

As Vice President, Kevin is responsible for all aspects of Blue Sky Administration, including service delivery excellence, relationship management, and business development. He has over 26 years of blue sky administration experience, including systems and infrastructure development, operations, and product distribution. Prior to joining Boston Financial, Kevin served as Vice President in the Asset Servicing Division at Bank of New York. Kevin led the Information Technology and Special Project teams as well as created information technology strategies for numerous product lines associated with state compliance and securities laws. He was also a founding partner at Automated Business Development (ABD) and instrumental in developing the company into a premier software and consulting firm. Kevin holds a Bachelor of Science in Business Administration from Boston University with a concentration in Management Information Systems.

Kevin Cloonan, Compliance Officer

In his role, Kevin is responsible for trade surveillance as it relates to Regulations 22c-1 and 22c-2. He also manages a staff of Compliance & Risk Analysts. Prior to joining Boston Financial in 2008, Kevin held positions at The McNamara Group, Computershare, and Putnam Investments. He holds a bachelor’s degree in Business Administration from State University of New York at Albany.

Craig Hollis

Craig Hollis

Craig joined Boston Financial in July of 2004. Craig has 32 years of mutual fund transfer agency experience in which time he has been responsible for managing numerous operational and support groups including: financial control, transfer agent and blue sky compliance, tax reporting and withholding, intermediary compensation, transaction processing and offshore distribution and servicing. Craig is currently responsible for the regulatory oversight of Boston Financial’s Transfer Agent activities as well as all operational aspects of Boston Financial’s compliance program including a 22c-2 full service solution and Blue Sky administrative services. Additionally, Craig represents Boston Financial in periodic Regulatory Compliance Advisory Group Sessions (RCAG) and is active in the industry, serving on the ICI Transfer Agent Advisory Committee, ICI Abandoned Property Task Force, ICI State Related Issues Working Group, ICI subcommittee on Money Market Reform (Institutional vs. Retail), NICSA Compliance Risk Committee, the Securities Transfer Association and has been a speaker at numerous industry events.


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