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IM Releases FAQs on Conflicts in Adviser Compensation

The SEC’s Division of Investment Management recently released a series of FAQs regarding certain investment adviser compensation arrangements and disclosure obligations. The FAQs come in the wake of the SEC’s share class disclosure initiative, which resulted in large penalties and fines for many advisory firms. Lawyers from Drinker Biddle wrote in a client alert that the FAQs show the SEC is focused on transparency and financial conflicts related to compensation. According to the IM release, advisers’ disclosure obligations go beyond compensation such as 12b-1 fees and revenue sharing. Disclosure obligations also apply to other forms of compensation, including an adviser’s direct or indirect receipt of service fees from its clearing broker-dealer, marketing-support payments from a mutual fund’s investment adviser, transaction fees, or receipt of payments from a mutual fund’s investment adviser to help defray the costs of educating and training its personnel regarding certain investment products. These forms of compensation could result in financial incentives that “would give rise to conflicts relating to, for example, the types of investments, the fund families, the particular funds and the share classes of individual funds that the adviser recommends, as well as the extent of trading it recommends,” IM staff wrote. The staff encouraged investment advisers to be proactive in reviewing their practices concerning the compensation that they, their affiliates or their associated persons receive in connection with the investments they recommend and related services they provide to identify conflicts of interest.

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