A pair of late July orders instituting cease-and-desist proceedings handed down by the Securities and Exchange Commission (SEC) highlights the SEC’s continued efforts to identify breaches of fiduciary duty, undisclosed conflicts of interest, breaches of duty to seek best execution and failure to adopt adequate policies and procedures by investment advisers transacting in mutual fund shares in client accounts.
What exactly do these proceedings signal? And what can other investment adviser firms learn from this? Let’s dig into the details to gain a little clarity.
Understanding the SEC’s mutual fund share class violation orders
While both orders issued by the SEC instituted cease-and-desist proceedings for investment advisers who did not select the least expensive mutual fund share classes for client accounts, the two violations were not identical in nature.
- The first order involved the selection of more expensive share classes with the benefits inuring to the adviser’s affiliate.
- The second order involved selection of more expensive share classes in an attempt by the adviser and its Investment Adviser Representatives to avoid additional transaction costs in a wrap fee program.
However, both orders cite violation of advisers’ fiduciary duty, which includes:
- Failure to seek best execution.
- Failure to make proper conflict of interest disclosures.
- Failure adopt and implement written compliance policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder in connection with its mutual fund share class selection and best execution.
Beyond the individual ramifications, these orders signal to the industry at large that the Commission is not taking their commitment to protecting investors lightly. In fact, the SEC’s 2022 exam priorities stated, “The Division will continue to address standards of conduct issues for broker-dealers and RIAs, with reviews focused on how they are satisfying their obligations under Regulation BI and the Advisers Act fiduciary standard to act in the best interests of retail investors and not to place their own interests ahead of retail investors’ interests…RIA examinations will focus on whether advisers are acting consistently with their fiduciary duty to clients, looking at both duties of care and loyalty, including best execution obligations, financial conflicts of interest and related impartiality of advice, and any attendant client disclosures.”
What does this mean for you? Investment Adviser firms must continue to diligently comply with their fiduciary duty as stated by the SEC or risk the serious penalties that come with non-compliance.
Don’t wait until it’s too late, schedule a check-up for your compliance program with NRS’s team of compliance consultants. Made up of former CCOs, legal professionals, and former regulators, our compliance consultants are experts in state, federal and SRO regulatory compliance. And we’re here to help you! Schedule a demo today!
About the Author
Max joined NRS in 2007 as a Consultant in the Investment Adviser Services Department and is based in our Massachusetts branch office. Max delivers comprehensive compliance solutions to all types of investment management firms, with special emphasis on private fund advisers, including hedge funds, funds of funds, private equity and debt funds, venture capital funds, real estate funds and other pooled investment vehicles.
Max earned his Juris Doctor degree Cum Laude from Boston College Law School in 2002. He is a member of the State Bar of Massachusetts.
After graduating from law school, Max accepted a corporate associate position with Choate Hall & Stewart LLP. During his tenure at Choate Hall, Max specialized in secured financing transactions, mergers and acquisitions, and bankruptcy litigation.
Max received his Bachelor of Arts degree Summa Cum Laude, graduating Phi Beta Kappa from Tufts University with majors in International Relations and Eastern European Studies.