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's Avakian Details Next 12b-1 Fee Crackdown

Your article was successfully shared with the contacts you provided.

Welcome back to Human Capital! I’m Melanie Waddell in Washington. Industry officials are finding a new compliance chore on their plate as the Securities and Exchange Commission plans a crackdown on 12b-1 fees as they relate to advisor disclosures and conflicts associated with bank deposit sweep programs.

Stephanie Avakian, co-director of the SEC’s enforcement division, signaled in a recent speech where the agency is headed with the BDSP initiative: “Cash in advisory accounts is often automatically swept into a money market mutual fund or a bank deposit sweep program,” she said. “A dually registered adviser or an adviser with an affiliated broker-dealer may have a financial interest, a conflict, in recommending one cash investment over another,” she warned.

The BDSP initiative comes on the heels of the securities regulator’s share class selection disclosure initiative, which was criticized as regulation by enforcement by the Financial Services Institute and former SEC Commissioner Paul Atkins.

Keep scrolling to hear industry attorneys’ chatter on the BDSP initiative.

The SEC, Avakian said, is in the initial stages of its BDSP initiative. What’s being examined? Proper disclosure of money market mutual funds that carry 12b-1 fees or make revenue-sharing payments that may be shared with a dually registered advisor or an advisor’s affiliated broker-dealer.

Advisors “recommending or choosing between different money market funds must make full and fair disclosure of these types of conflicts to their clients,” Avakian warned, noting that the SEC has brought enforcement actions where advisors have failed to make appropriate disclosure.

Another concern: Clearing brokers that offer bank deposit sweep programs where an investor’s uninvested cash is swept into an interest-bearing bank account. “In some cases, the bank, often an affiliate of the clearing broker, agrees to share a portion of the revenue the bank earns on the investor’s deposits with the clearing broker.”

In turn: The clearing broker “may agree to share a portion of the revenue it received with the investor’s dually registered investment advisor or with the advisor’s affiliated broker-dealer,” said Avakian.

The problem: “In some cases, the revenue received by the advisor or the advisor’s affiliate far exceeds the interest earned by the client on its cash.”

These arrangements “may actually lower the interest paid to the client,” creating a clear conflict. “Without full and fair disclosure, investors cannot make an informed investment decision to agree to the advisor’s cash sweep vehicle selection.”

David Bellaire, FSI’s general counsel, argues the BDSP initiative “is a continuation of the regulator’s trend of regulating by enforcement.” The SEC, he said, must “stop regulating by enforcement and penalizing our members for practices that had previously not been deemed unacceptable.”

What should advisors do? Eversheds Sutherland attorneys opined in a recent brief that “firms may want to assess all potential conflicts related to their sweep account options they recommend or select.”

Disclosures should be reviewed, the attorneys advise, “to assure that material conflicts are fully and fairly disclosed, including a discussion of the nature and magnitude of the conflicts, its impact on clients, and how the firm is managing the conflicts.”

Beyond this: advisory firms should assess their “processes to assure that recommendations and selections regarding sweep account options satisfy their advisor’s duty of care to clients.”

— Related on ThinkAdvisor:


© 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.