Friday, July 29th, 2016

The SEC’s Office of Compliance Inspections and Examinations released a risk alert on July 13, 2016 introducing its Share Class Initiative.  As part of OCIE’s continued focus on matters of importance to retail investors, OCIE identified possible conflicts of interest tied to advisers’ compensation for recommending mutual fund and 529 Plan share classes that have substantial loads or distribution fees. The conflict is created in situations where the adviser is a broker-dealer (or is affiliated with a broker-dealer) that receives fees from sales of certain share classes and where advisers recommend that clients purchase more expensive share classes of funds for which an affiliate of the adviser receives more fees. To address such conflicts advisers must make sure their disclosure materials (including the Form ADV Part 2 brochure) discuss whether the adviser or any of its supervised persons accept compensation for the sale of securities or other investment products, including asset-based sales charges or service fees from the sale of mutual funds.  As part of the initiative, OCIE will conduct targeted, risk-based examinations in an effort to review advisers’ actual practices surrounding the selection of mutual fund and 529 Plan investments, the disclosures made to clients and prospective clients regarding such practices, and any corresponding internal compliance programs.