Episode 60: Are You Disclosing All Financial Compensation Conflicts?

On episode 60 of the CCO Buzz, Lead Sr. Compliance Consultant Tina Mitchell discusses the frequently asked questions, published by the SEC, that provide guidance on disclosure by investment advisers of compensation arrangements and surrounding conflicts. 


 CCO Buzz: Hello and welcome back to the Buzz! We hope everyone is enjoying the Holiday Season! On this episode, Lead Sr. Compliance Consultant Tina Mitchell is here to speak with us about if your firm is disclosing all financial compensation conflicts. We hope you enjoy the episode!

Tina Mitchell: Last month, the SEC published frequently asked questions that provide guidance on disclosure by investment advisers of compensation arrangements and surrounding conflicts. There are only six questions; however, most answers contain detailed information and examples, so, if you haven’t read these already, I suggest you do.

For this week’s CCO Buzz, I’m going to discuss the more salient points reflected in the FAQs and some of the examples of information that need to be disclosed:

  • Advisers owe their clients a duty of care that requires them to provide investment advice that is in the best interest of the client.
  • Advisers are required to eliminate or at least expose, through full and fair disclosures, all conflicts of interest that might incline them to render advice that is not disinterested. 
  • Disclosures must include “sufficiently specific facts” to allow clients to understand applicable conflicts and give informed consent or reject them.
  • Advisers must disclose if they or their supervised persons accept sales compensation, including but not limited to asset-based sales charges or service fees.
  • When a conflict exists, advisers must disclose how they address the conflicts. 
  • Advisers disclosing that they “may” have a conflict when there actually is a conflict is not adequate disclosure. 
  • Some examples of material facts to be disclosed pertaining to share class and revenue sharing conflicts include: 
    • The fact that the adviser has financial interests in the choice of the mutual fund share classes that conflict with the interest of clients. This is applicable when a firm or its representatives receive 12b-l fees or other types of compensation or benefits when placing clients in mutual fund investments. 
    • How sales charges, transaction fees and ongoing fees affect a client’s investment returns over time. 
    • That different share classes for the same recommended mutual fund are available and that they represent the same underlying investments.
    • Whether there are any limitations on the availability of share classes to clients that are due to the business of the adviser or the service provider the adviser uses, such as custodians or clearing brokers. 
    • Whether periodic reviews of accounts are performed to determine if converting to another share class is available and appropriate.
    • Whether a practice of offsetting or rebating some or all of the additional costs to clients are made, along with the details of such practice.
    • Whether any payments from a clearing broker or custodian are provided to the adviser when clients invest in non-transaction-fee mutual funds or when recommendations are made to invest in 12b-1 fee paying share classes. 

While the FAQs mainly focus on conflicts regarding mutual fund share class selection and revenue sharing arrangements, the SEC does stress in the FAQs that many of the same principles and disclosure obligations apply to other forms of compensation received by advisers.

Compensation conflict is an area the SEC remains very focused on during exams and they continue to bring enforcement actions against advisers for inadequate disclosures. So if you need assistance with ensuring your disclosures are robust, Core Compliance can help. Just contact us at 619-278-0020 or email us at info@corecls.com. Thank you.

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-in to next week’s episode of the CCO Buzz.


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