Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Regulation and Compliance > Federal Regulation > SEC

SEC to RIAs: Beware the Ides of ‘May’

Your article was successfully shared with the contacts you provided.

A recent string of SEC enforcement actions should prompt advisors to carefully review their Form ADV for one potentially dangerous word: “may.” It likely appears many times throughout various sections, and in most instances is likely perfectly appropriate. Where it isn’t appropriate, the SEC has made clear, is when it is used to describe an existing compensation arrangement that creates a conflict of interest. 

In her remarks to the IA Watch 17th Annual IA Compliance Conference in February, Julie Riewe, Co-Chief of the SEC’s Asset Management Unit within the Division of Enforcement, dedicated significant speaking time to what she described as “conflicts, conflicts everywhere.” She explained that “In nearly every ongoing matter in the Asset Management Unit, we are examining, at least in part, whether the adviser in question has discharged its fiduciary obligation to identify its conflicts of interest and either (1) eliminate them, or (2) mitigate them and disclose their existence to boards or investors. Over and over again we see advisers failing properly to identify and then address their conflicts.”

Identification of conflicts of interest is only half the battle; disclosing them completely and accurately (e.g., in Form ADV) is equally as important. This focus on complete and accurate conflicts disclosure is ostensibly a result of the Asset Management Unit’s “Undisclosed Adviser Revenue risk-analytic initiative,” which has been finding exactly what it was looking for.

Three specific cases are cited as examples: In re Shelton Financial Group, Inc. (Jan. 13, 2015), In re The Robare Group, Ltd. et al. (Sept. 2, 2014), and In re Focus Point Solutions, Inc. (Sept. 6, 2012). I’d add an additional case as well: In re Alan Gavornik et al. (November 24, 2014). All are worth a read, and all center on unidentified or improperly disclosed conflicts of interest. In instances when conflicts were properly identified but improperly disclosed, the SEC cited the respondents’ use of “may” in Form ADV as misleading: 

Robare: “In addition, the revised disclosure is inadequate because it states that Robare Group may receive compensation from Broker when it was, in fact, receiving payments from Broker.” 

Focus Point: “In addition, the use of the prospective ‘may’… is misleading because it suggested the mere possibility that Tore would make a referral and/or be paid ‘referral fees’ at a later point, when in fact a commission sharing arrangement was already in place and generating income to Tore and Respondents.” 

Bottom line: if a conflict-ridden compensation arrangement or revenue stream already exists and is actually being realized by the advisor, even if not in all conceivable circumstances, use of the word “may” or other prospective language is inappropriate. Assertive, definitive, and non-conditional language should be used when crafting conflicts disclosure in Form ADV, as examiners are clearly paying attention to each and every chosen word.

Semantics matter.

As Ms. Riewe suggests, query whether conflicts are disclosed “in a manner that allows clients or investors to understand the conflict, its magnitude, and the particular risk it presents.” In other words: state the conflict unambiguously, explain why it is a conflict and why the client should care, give some sense of scale, and describe how the advisor has taken steps to mitigate the conflict.

For examples of common conflicts in the advisory space, take a peek at my conflicts article in ThinkAdvisor a little over a year ago.

Just in case you think this is a passing SEC fad, think again: “On the horizon, we expect to recommend a number of conflicts cases for enforcement action,” Ms. Riewe concludes.

Julius Caesar was warned by a soothsayer to beware the ides of March; consider yourself warned regarding may. 


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.