Advisers, Brokers on Alert as SEC Looks into Revenue Sharing Arrangements

Two recent SEC actions on conflicts of interest in revenue sharing arrangements are putting the industry on notice. Trade publications such as Financial Advisor magazine say that the success of the SEC’s share class self-reporting initiative may have spurred “the beginning of a robust spate of legal complaints and a possible new initiative—this time zeroing in on RIA revenue-sharing activity.” The SEC recently chargedCetera Advisors, LLC, a registered investment adviser and broker-dealer, with breaching its fiduciary duty and defrauding its retail advisory clients by, among other things, failing to disclose conflicts of interest related to the firm’s receipt of over $10 million in undisclosed compensation from 12b-1 fees, revenue sharing, service fees and markups. Cetera did not participate in the share class self-reporting initiative. Another firm Commonwealth Financial Network agreed to pay $1.6 million in March under the SEC’s share class self-reporting initiative, but was charged in August with failing to disclose material conflicts of interest related to revenue sharing Commonwealth received for certain client investments. The SEC alleged that between July 2014 and December 2018, Commonwealth received over $100 million in revenue sharing from a broker related to client investments in certain share classes of “no transaction fee” and “transaction fee” mutual funds. Groups such as the Financial Services Institute, which represents independent financial services firms and independent financial advisers, have come out against the share class initiative, describing it as “drive-by regulating without rules.” The trade organization launcheda campaign calling for a halt to the enforcement cases on Sept. 4., and advisors and broker-dealer executives are expected to visit Capitol Hill to make their case directly to lawmakers, according to a report in Financial Planning. Morningstar columnist John Rekenthaler writes that revenue sharing is “an ongoing mess,” fraught with inherent conflicts and ineffective disclosure requirements that do not benefit the consumer and called for a rewrite of the rules.