Close Close

Regulation and Compliance > Federal Regulation > SEC

'Specificity' Advised for RIAs in Wake of SEC Self-Reporting Initiative

Your article was successfully shared with the contacts you provided.
U.S. Securities and Exchange Commission building in Washington, D.C. Future investigations may not fall directly under the SEC’s Share-Class Disclosure Initiative, but will be an offspring of the initiative, according to James Lundy, a partner with Drinker, Biddle & Reath. (Photo: Diego M. Radzinschi/ALM)

Financial advisors registered with the Securities and Exchange Commission should expect continued scrutiny from regulators in the wake of a self-reporting initiative that brought 79 settlements with advisors and returned more than $125 million to investors.

The SEC’s Share Class Selection Disclosure Initiative, launched in early 2018, gave advisory firms four months to self-report failures to adequately disclose 12b-1 fees and recommendations of higher cost share classes when lower cost shares of the same investments were available.

In some cases, firms that did not self-disclose during the first initiative are already receiving document requests from the SEC.

Future investigations may not fall directly under the SCSD initiative, but will be an offspring of the initiative, according to James Lundy, a partner with Drinker, Biddle & Reath.

“There’s an expansive effort by the SEC’s enforcement division pertaining to revenue sharing,” Lund said in a recent webinar hosted by the firm.

“There will be more to come,” he said of the agency’s investigations of how RIAs are capturing 12b-1 fees, and whether they are fully disclosing all conflicts of interest on their Form ADV. “The asset management unit that led this initiative has been emboldened.”

Attorneys for the firm advise revising ADV and other client disclosure forms to include specific language on all revenue arrangements with mutual fund companies or custodians that would qualify as a conflict of interest.

“The more specificity, the better chance you have to avoid scrutiny,” said Fred Reish, also a partner in the firm. “Caution is a better approach.”

The SEC is taking particular aim at the use of the word “may” in Form ADV filings—as in a specific investment “may” create a conflict of interest.

One firm that settled with the SEC several years before the SCSD initiative ultimately sued the agency. In 2015, an administrative law judge ruled in favor of The Robare Group, saying the firm acted in good faith in constructing its disclosures, noting that it went so far as to hire a third-party compliance firm.

But the SEC appealed, and in 2016 the Commission overturned the administrative law judge’s ruling, and found the firm failed to adequately disclose material conflicts of interests, and willfully omitted material facts from its Form ADV.

Last January, the case was heard before the Court of Appeals for the District of Columbia. During oral arguments, the three-judge panel focused specifically on the firm’s use of the word “may” in its Form ADV.

A ruling is expected within the next months, and could have a considerable impact on how the SEC enforces disclosures, attorneys for Drinker Biddle said.

— Check out Advisors to Return $125M in 12b-1 Fees Under SEC Share Class Initiative on ThinkAdvisor.