More On Legal & Compliancefrom The Advisor's Professional Library
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
Of the series of concerns that industry trade groups raised with the Securities and Exchange Commission (SEC) in their comments concerning revisions to mutual fund distribution fees under Rule 12b-1, one issue of considerable importance, the groups say, is that smaller investors would be significantly challenged in their ability to receive access to an advisor. Comments on the SEC’s proposal to replace Rule 12b-1 with Rule 12b-2 were due by Nov. 5.
For instance, David Bellaire, general counsel and director of government affairs at the Financial Services Institute (FSI), says FSI polled some of its advisor members and they agreed that the SEC’s proposed Rule 12b-2 would result in “unintended consequences” for smaller investors—those with total invested assets in mutual funds of $100,000 or less. “The proposal will reduce access to professional service and support” for these smaller investors, Bellaire says, who advisors say represent a majority of their mutual fund clients.
Under the SEC’s proposal, C shares would be subject to a cap. “The ongoing sales charges would be capped at a certain point, which would differ from fund to fund,” but the caps would be either the lower of the fully loaded A share mutual fund or 6.25% under the FINRA rule, Bellaire explains. “So positions in C shares would come with an expiration date” that basically indicates when an advisor’s compensation would end. The challenge here, Bellaire continues, “is that clients will be put in a position where they have to choose whether they will receive ongoing service and support from their trusted advisor, or whether they will hold on to a mutual fund position, which is appropriate for them, and not get that ongoing support and service.”
To this point of ongoing advice, however, the CFP Board argued in its comment letter to the SEC that “we believe an ongoing sales charge that is capped at the maximum amount of an up-front sales charge is sufficient to pay for this continuing advice, rather than allowing a sales charge that continues indefinitely, as is currently possible with some C share class mutual funds.” The CFP Board does not “believe the existing practice of some, but not all, mutual funds to have a class of shares pay a sales load indefinitely (e.g., C shares) is in the best interests of investors.”
Under 12b-2, the rule applies new names. For instance, the A share trail will be labeled a “marketing and service fee” under the new rule. C shares where there is an additional 75 basis points on top will be referred to as the “ongoing sales charge.” While these new descriptive labels do provide clarity, Bellaire says, the proposal would place “very complex and detailed new disclosure requirements on broker-dealers if they create confirmation statements.”