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November 26, 2019 at 04:57 PM
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.
