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The Wagner Law Group

The Wagner Law Group is a nationally recognized practice in the areas of ERISA and employee benefits, estate planning, employment, labor and human resources and investment management.

 

Established in 1996, The Wagner Law Group is dedicated to the highest standards of integrity, excellence and thought leadership and is considered to be amongst the nation's premier ERISA and employee benefits law firms. The firm has seven offices across the country, providing unparalleled legal advice to its clients, including large, small and nonprofit corporations as well as individuals and government entities worldwide. The Wagner Law Group's 29 attorneys, senior benefits consultant and four paralegals combine many years of experience in their fields of practice with a variety of backgrounds. Seven of the attorneys are AV-rated by Martindale-Hubbell and six are Fellows of the American College of Employee Benefits Counsel, an invitation-only organization of nationally recognized employee benefits lawyers.  Seven of the firm's attorneys have been named to the prestigious Super Lawyers list for 2017, which highlights outstanding lawyers based on a rigorous selection process.

 

 

 

Contact Info

The Wagner Law Group

 

  Integrity | Excellence

  

Boston 

Tel: (617) 357-5200 

Fax: (617) 357-5250 

99 Summer Street 

13th Floor

Boston, MA 02110

 

Washington, D.C.

Tel: (202) 969-2800

 

Fax: (202) 969-2568

 800 Connecticut Avenue, N.W.

Suite 810

Washington, D.C. 20006

 

Chicago

Tel: (847) 990-9034

Fax: (847) 557-1312

190 South LaSalle Street

Suite 2100

Chicago, IL 60603

 

  

Palm Beach Gardens 

Tel: (561) 293-3590
Fax: (561) 293-3591
7108 Fairway Drive
Suite 125
Palm Beach Gardens, FL 33418

   

Tampa

Tel: (813) 603-2959

Fax: (813) 603-2961

101 East Kennedy Boulevard

Suite 2140
Tampa, FL  33602 

  

San Francisco

Tel: (415) 625-0002

Fax: (415) 358-8300

300 Montgomery Street

Suite 600

San Francisco, CA 94104

  

St. Louis

Tel: (314) 236-0065

Fax: (314) 236-5743
25 W. Moody Avenue
St. Louis, MO  63119 

 

 

www.wagnerlawgroup.com

 

 

 

 January 18, 2018 

 

Investment Management

Law Alert

 

Regulatory Focus on Share Class Selection in 2018

 

 

 

In recent years, the Office of Compliance Inspections and Examinations ("OCIE") of the Security and Exchange Commission ("Commission") has increasingly scrutinized share class selection by registered advisors. A share class recommendation must comport with the requirements of Section 206 of the Investment Advisors Act of 1940 ("Advisers Act") to act in the client's best interest and to seek best execution for client transactions. Consistent with its 2016 examination priority to protect retail investors, OCIE launched its 2016 Share Class Initiative to examine registered advisors' practices related to share class recommendations and compliance oversight of the process. Protecting retail investors continued to be a priority for OCIE in 2017 and share class selection appeared on its list of exam priorities for 2017 as well. Specifically, OCIE is concerned with conflicts of interest and other factors that may affect an advisor's recommendation to invest, or remain invested, in particular mutual fund and 529 plan share classes. For example, OCIE seeks to identify conflicts of advisors who are also registered representatives of a broker-dealer which may influence recommendations in favor of share classes that have higher loads or distribution fees. During an exam on this topic, OCIE has focused on disclosures and compliance policies and procedures in addition to the fiduciary duty to act in the client's best interest and to seek best execution.

 

This area has been the subject of two recent enforcement actions by the Commission, both in September 2017. In the first, the Commission issued a cease and desist order against registered investment advisor Envoy Advisory, Inc. ("Envoy") on September 8. From January 2013 through March 2017, the Commission concluded that Envoy recommended to plans and IRA owners Class A mutual fund shares when less expensive share classes of the same mutual funds were available. During that time, Envoy's affiliate received approximately $24,800 in 12b-1 fees. Envoy's Form ADV did disclose the payment of 12b-1 fees, but failed to specify that such payments were received by its affiliate, instead saying they were paid to a "dealer". The Commission found that Envoy failed to offer the least expensive mutual fund share class available and failed to properly disclose the practice. Envoy agreed to the disgorgement of the amounts improperly received.

 

On September 14, 2017, the Commission charged a subsidiary of SunTrust Banks with collecting more than $1.1 million in avoidable fees from clients for improperly recommending more expensive share classes of a variety of mutual funds when cheaper shares of the same funds were available. This practice affected more than 4,500 accounts. The Commission's order states that SunTrust violated sections 206(2), 206(4) and 204 of the Adviser's Act and Rule 206(4)-7. SunTrust agreed to pay a penalty in the amount of $1,148,071.01, disgorgement of the fees plus interest, and to be censured.

 

Takeaways

  

In light of its recent enforcement actions and the fact that exam priorities do not change substantially from year to year, we believe share class selection is likely to remain an enforcement focus for the Commission in 2018. We expect the Commission to release its 2018 exam priorities soon.

  

The Financial Industry Regulatory Authority ("FINRA"), has specifically identified share class selection as a priority in its recently released 2018 Annual Regulatory and Examination Priorities Letter ("Letter"). With respect to FINRA's suitability requirement, the Letter states that "FINRA will review firms' handling of products where FINRA has observed firms experiencing problems implementing effective controls, such as firms' handling of...multi-share products as addressed in the Examination Findings Report..." The Examination Findings Report ("Report") was issued in December 2017, and was the topic of our Alert, which can be read here. The Report stated that FINRA found that some firms failed to meet their suitability obligations with respect toindividual customers when recommending multi-share class products. For example,FINRA observed situations where firms recommended a higher-fee share class withouta reasonable basis to believe that the recommendation was suitable.

 

Therefore, member firms -- dually-registered firms, in particular -- should be mindful of their disclosures and that their compliance programs are designed to prevent and remediate violations of best interest, best execution and other rules. Because examination staff will likely review past and current Form ADV conflict disclosure language, it is imperative that such disclosures accurately reflect existing practices. Regular advisor training is also an effective preventative measure.

  

 

If you have further question, please contact Stephen Wilkes   

If you have further question, please contact Stephen Wilkes (swilkes@wagnerlawgroup.com) directly.

 

 

 

 

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This Newsletter is provided for information purposes by The Wagner Law Group to clients and others who may be interested in the subject matter, and may not be relied upon as specific legal advice.  This material is not to be construed as legal advice or legal opinions on specific facts. Under the Rules of the Supreme Judicial Court of Massachusetts, this material may be considered advertising.