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Morningstar Takes Cautious Stance on Revenue Sharing

Revenue sharing – which can create conflicts of interest when a broker recommends one fund over another because of payments received from the adviser -- has been a hot topic both from the regulatory and business side of the industry. In recent remarks Stephanie Avakian, SEC Enforcement Division Co-Chief, said the Division is not “resting on the success of the Share Class Initiative” and is continuing to look for other undisclosed material conflicts of interest that can harm investors. Avakian cited revenue sharing and cash sweeps among other Division focus areas. Avakian explained that revenue sharing conflicts can result from a variety of scenarios. “A dually-registered adviser or an adviser affiliated with an introducing broker has a conflict of interest when selecting between funds or share classes of funds that pay revenue sharing and those that do not. Specifically, the adviser has an incentive to invest clients in mutual funds that pay more revenue sharing than those that do not,” Avakian said. Meanwhile, Morningstar released a white paper on conflicts of interest and Regulation BI with a deep focus on revenue sharing arrangements. According to Morningstar, revenue sharing presents several unique challenges in evaluating its impact on investor outcomes. The paper notes, for example, that while not all revenue-sharing payments create conflicts, certain types of payments to brokers clearly create a conflict, however the materiality of the conflict can be difficult to assess. Morningstar recommended that the SEC collect data on revenue sharing in a structured, standardized format to facilitate further research in this area.

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