As broker-dealers move to standardize the commissions they pay to meet the Department of Labor’s fiduciary rule, more mutual funds and B-Ds are creating and offering investors “clean share” mutual funds.

But while there are many benefits to cleaning up the alphabet soup of mutual fund shares and standardizing fees offered to investors, clean shares have their own conflicts, Morningstar analyst Aaron Szapiro told an audience at the Consumer Federation of America’s 30th Annual Financial Services Conference in Washington D.C.

Clean share conflicts include any obscure fees, including platform fees, revenue-sharing arrangements or sub-transfer agent (TA) fees, which can cost investors 5 to 15 basis points, Szapiro told Financial Advisor Magazine. “It’s the variable payments that concern us more than anything,” he added.

“We’ve told the Labor Department to proceed cautiously in using clean shares as a new exempted class for the fiduciary rule, and we have told the SEC that the definition in Section 22(d) may not protect investors from other potential conflicts,” Szapiro said.

The growing reliance on clean shares, designed to standardize commissions and fees to avoid conflicts of interest for investors and minimize liability for the industry, appears to be increasing in large part because of an SEC opinion letter released earlier this year and growing conjecture that the DOL will add a clean share exemption to the fiduciary rule. 

The DOL did not immediately respond to a request for comment on the possibility of a clean share exemption. But both LPL Financial and Capital Research and Management Group are developing clean share classes to minimize conflicts of interest and confusion for investors and liability for themselves and brokers and advisors who sell their products, executives who spoke at the CFA conference said.

Industry and regulators generally agree that clean shares are defined as mutual fund shares that have no front-end loads or 12b-1 fees, which are used to pay for a mutual fund’s distribution costs, In addition, investors are expected to pay fees outside the fund for any advice—that is, the broker or advisor charges it directly to a client. But, there is disagreement about whether clean shares should include sub-transfer agency fees, or sub-TA fees, and other kinds of revenue sharing.

“A big part of the definition depends on what we expect clean shares to do and how much protection we think they give investors from conflicted advice on their own,” Szapiro said.

“As we’ve told the regulators, there is promise and peril in embracing clean shares,” Szapiro added.

“If regulators assume that clean shares with sub-TA fees and other kinds of revenue sharing are the same as the cleanest shares without them, they will be endorsing products that can have embedded conflicts of interest. These kinds of third-party payments obscure business relationships that can push a firm to sell one mutual fund over another. These back-door payments will elevate the conflicts of interest from the advisor level to the firm level, and add opacity to the way mutual funds are bought and sold.”

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