Episode 41: Best Practices Regarding the SEC's Share Class Selection Disclosure Initiative

We discuss disclosures and the SEC’s Share Class Selection Disclosure Initiative. Some news out of the SEC recently and we thought we’d share some tips and best practices that can be applied to firms as they complete their Form ADVs requirements.

 

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CCO Buzz: Hello and welcome back to the CCO Buzz. Remember to “Beware the Ides of March” – We’re not sure what that’s about because we looked into it, Ides really is just a marker for lunar phases, meaning that term literally means the first full moon of the month. That doesn’t seem so scary, but also there isn’t a full moon tonight. So… big lie.

I don’t know where I was going with that, but today on episode 41 of the CCO Buzz we have Core Compliance’s Compliance Consultant Adam Stutz. He’s here to discuss disclosures and the SEC’s Share Class Selection Disclosure Initiative. Some news out of the SEC this week and we thought we’d share some tips and best practices that can be applied to firms as they complete their Form ADVs requirements.

So, Adam, take it away!

Adam Stutz: This past Monday, the SEC announced that it had settled charges against 79 investment advisers who self-reported violations of the Adviser’s Act resulting in the return of more than $125 million in fees to clients. The actions are the result of the SEC’s 2018 Share Class Selection Disclosure Initiative, which encouraged advisers to self-report violations of the Adviser’s Act for failure to provide adequate or incorrect disclosures to their clients regarding the receipt of 12b-1 fees for investments selected.

The commission found that the investment advisers charged, failed to adequately disclose conflicts of interest related to the sale of higher-cost mutual fund share classes when a lower-cost share class was available. 

Specifically, the SEC’s press release stated:

  • The investment advisers that settled placed their clients in mutual fund share classes that charged 12b-1 fees when lower-cost share classes of the same fund were available to their clients and didn’t provide adequate disclosure about the higher cost of the selected share class; and,
  • the 12b-1 fees were routinely paid to the investment advisers in their capacity as brokers, their broker-dealer affiliates, or to their personnel who were also registered representatives, creating a conflict of interest with their clients, as the investment advisers stood to benefit from the clients’ paying higher fees.

In light of the orders handed down by the SEC, and because we are in the midst of ADV season, we feel it is important to highlight the necessity of proper disclosures to clients, especially around the use of more expensive share classes for clients and conflicts of interest that stem from the receipt of commissions related to the sale of higher fee mutual fund share classes.

Make sure to review your Form ADV Part 2A and other relevant disclosure documents and make updates and corrections as necessary. You want to remember to disclose any conflicts of interest that would be material to a client’s use of the firm’s services, including the receipt of fees and commissions that could benefit your firm or your firm’s personnel.

Lastly, in light of the SEC’s orders, make sure that you are documenting the share classes that are being selected for clients and the reasons why clients may be placed into higher share classes as well as seeing if lower-cost share classes are available.

To view the SEC’s press release related to their order, visit www.sec.gov/news and if you have any questions or concerns regarding your Form ADV 2A disclosures, conflicts of interest and/or testing share class costs, call us at (619) 278-0020 or visit us on the web at www.corecls.com

CCO Buzz: Well that’s it for this week’s episode. If you’d like additional information, please check out our website at www.corecls.com. You can also follow us on Facebook, LinkedIn or Twitter @CoreCLS. Thank you and we hope you tune into next week’s episode of the CCO Buzz.

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