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July 26, 2016 at 08:00 PM
The Securities and Exchange Commission launched on July 13 an exam sweep to identify conflicts of interest tied to advisors’ compensation when recommending mutual fund and 529 plan share classes with “substantial loads or distribution fees,” including 12b-1 fees.
The SEC’s Office of Compliance Inspections and Examinations issued a Risk Alert announcing its Share Class Initiative, stating that SEC examiners will assess whether advisors have conflicts of interest when making recommendations about share classes to their clients.
Jane Jarcho, national director of investment advisor exams, who was also recently named OCIE’s deputy director, warned in mid-April that the Share Class Initiative was forthcoming.
The Risk Alert noted that examiners will zero in on areas deemed to be high risk — notably whether advisors are fulfilling their fiduciary duties and seeking best execution when recommending or selecting mutual fund and 529 plan investments, whether necessary disclosures are being made in their Form ADVs, and whether advisors’ compliance policies and procedures are being implemented to prevent share class compensation infractions.
OCIE warned, however, that examiners may select additional topics to review based on other risks identified during the exam.
OCIE noted that an example of a conflict of interest related to share class recommendations includes situations where the advisor is also a broker-dealer or affiliated with a broker-dealer that receives fees from sales of certain share classes, as well as arrangements where the advisor recommends that clients purchase more expensive share classes of funds for which an affiliate of the advisor receives more fees.
An SEC spokesperson declined to say how many advisors would be examined and how long the initiative will take.
SEC Investor Advocate Rick Fleming told Congress in late June that his office and other agency divisions will be “actively involved” in an investor testing program next year examining the efficacy of various mutual fund cost disclosures, including 12b-1 fees.
