On July 13, 2016, the SEC’s Office of Compliance Inspections and Examinations (the “OCIE”) issued a Risk Alert announcing a new exam initiative that will focus on the conflicts of interest that arise when advisers receive compensation or financial incentives for recommending mutual fund and 529 Plan share classes that have substantial loads or distribution fees. According to the Risk Alert, “examples of conflicts of interest related to share class recommendations include situations where the adviser is also a broker-dealer or affiliated with a broker-dealer that receives fees from sales of certain share classes, and situations where the adviser recommends that clients purchase more expensive share classes of funds for which an affiliate of the adviser receives more fees.” The Risk Alert indicates that the OCIE will conduct focused, risk-based examinations on the following “high risk” areas:
- Fiduciary Duty and Best Execution. Whether advisers are acting in the clients’ best interests and seeking best execution when recommending or selecting mutual fund and 529 Plan investments to clients.
- Disclosures. The accuracy, adequacy and effectiveness of advisers’ disclosures regarding compensation for the sale of shares and related conflicts of interest.
- Compliance Program. The adequacy and effectiveness of advisers’ written policies and procedures surrounding its selection of mutual fund and 529 Plan share class investments in clients’ accounts.
The OCIE notes that, while the topics noted above are the primary areas of focus for the initiative, examiners may select additional topics based on other risks identified during the examinations.