More On Legal & Compliancefrom The Advisor's Professional Library
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
The short answer? Don’t do it.
It’s hard to imagine any compliance department worth its salt would let it happen in this day and age, but if it somehow gets through, advisors are forewarned.
“In the staff’s view, when a mutual fund or other investment company uses a name that suggests safety or protection from loss, the name may contribute to investor misunderstanding of the risks associated with an investment in the fund and, in some circumstances, could be misleading,” the update says. “The staff encourages any fund that exposes investors to market, credit or other risks, and whose name suggests safety or protection from loss, to re-evaluate the name and to consider changing the name, as appropriate, to eliminate the potential for investor misunderstanding.”
It goes on the say that the SEC has recently heightened its scrutiny of fund names suggesting safety or protection from loss and has determined “to object to names that may create an impression of protection or safety or absence of risk of loss, where the name does not include qualifying language that defines the scope and limits of such protection.”
For example, it notes that some funds that seek to manage the fund’s volatility by investing a portion of the fund’s assets in cash, short-term fixed income instruments, short positions on exchange-traded futures, or other investments included the term “protected” in their name. The SEC was concerned that these names could convey to investors a level of protection from loss that was not present because the degree to which a managed volatility strategy may succeed or fail is uncertain. In response to its concerns, some funds have chosen to replace the term “protected” with terms such as “managed risk."
“The staff acknowledges that a fund’s name, like any other piece of information about a fund, cannot tell the whole story about the fund,” it concludes. “We also acknowledge that the staff has recently requested name changes in situations in which a fund had provided prospectus disclosures that explained limitations on the scope of “protection” provided by the fund that were not revealed by the name itself. We have made these requests because we believe that, in practice, investors sometimes focus on a fund’s name to determine the fund’s investments and risks, either because the name sometimes appears without the clarifying prospectus disclosures (e.g., in advertisements) or because of the prominence of a fund’s name or for other reasons.”