SEC to audit RIAs over the types of mutual fund share classes they sell to clients
The agency is particularly interested in conflicts of interest where the adviser is also a broker-dealer or affiliated with a broker-dealer that gets fees from sales of particular share classes.
The Securities and Exchange Commission will take a close look at the types of mutual fund share classes that registered investment advisers sell to their clients.
The SEC’s Office of Compliance Inspections and Examinations announced Wednesday that it will examine advisers’ practices related to share class recommendations and compliance oversight of the process. The premise: Advisers are fiduciaries and, as such, they have a duty to act in their clients’ best interests.
The SEC will be particularly interested in conflicts of interest where the adviser is also a broker-dealer or affiliated with a broker-dealer that gets fees from sales of particular share classes. Of particular interest: When an adviser recommends an expensive share class for which an affiliate of the adviser receives more fees.
Fiduciaries are generally required to choose the lowest-cost share classes and 529 plan investments for clients, given their investment objectives. “Examiners will review advisers’ books and records to identify share classes held and purchased in clients’ accounts and any compensation received by the adviser or any of its associated persons related to such investments,” the SEC release said.
The SEC will also take a look at how advisers are disclosing “whether the adviser or its supervised persons accepts compensation for the sale of securities or other investment products, including asset-based sales charges or service fees from the sale of mutual funds,” the agency’s notice said.
Finally, examiners will check whether advisers have written policies and procedures designed to prevent violations of section 206 of the Advisers Act, which require advisers to act in clients’ best interest. “Examiners will likely review the adviser’s practices surrounding its selection of mutual fund and 529 Plan share class investments in clients’ accounts and assess the adequacy and effectiveness of the adviser’s corresponding written policies and procedures,” the SEC said.
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