SEC Alerts Registered Advisers About Share Class Exam Initiative

On July 13, 2016, the Securities and Exchange Commission (“SEC”), through their Office of Compliance Inspections and Examinations (“OCIE”), issued a Risk Alert outlining their exam initiative on risks and conflicts pertaining to investment adviser recommendations of mutual funds and 529 Plans.  Specifically, the Risk Alert outlined that OCIE is “seeking to identify conflicts of interest tied to advisers’ compensation or financial incentives for recommending mutual funds and 529 Plan share classes that have substantial loads or distribution fees (“Share Class Initiative”).”  

The examinations performed by OCIE under the Share Class Initiative will look at, among other things, three main areas they believe are high risk:

  1. Fiduciary Duty and Best Execution – focusing on whether recommendations are in clients’ best interest and advisers are looking to obtain best execution.
  2. Disclosures – reviewing disclosures, especially in Form ADV Part 2A, to determine if there is language on whether the advisers or any supervised persons receive compensation from the sale of these and/or other investment products, along with disclosures pertaining to the surrounding conflicts and how advisers are addressing such conflicts.
  3. Compliance Program – assessing the “adequacy and effectiveness” of advisers’ policies and procedures covering the selection process of mutual funds and 529 Plans share class investments.

The SEC publishes Risk Alerts to put firms on notice of current issues the staff has identified as potentially problematic with the hope that senior management and compliance personnel will review their current compliance and risk management practices regarding the identified risk area and make any necessary updates.  Additionally, over the years the SEC has delineated in various speeches and guidance that their expectation is for advisory firms to be performing risk assessments covering all areas of their business at least annually to help ensure that they have identified and addressed applicable risks and maintain strong internal controls, along with appropriate written policies and procedures.

One of our core service offerings is performing risk assessments for investment advisers, broker-dealers, private funds, and registered investment companies, which includes assisting firms with identifying risks, drafting applicable written policies and procedures and disclosures, and implementing controls.  For further information, or if you have questions, please contact us at (619) 278-0020 or info@corecls.com.