Brief Introduction | SEC Fines RIA $760k+ Over Wrap Fees
Recently, the SEC fined an RIA Firm over $760,000+ over Wrap Fees.
The RIA and its advisors allegedly benefitted by avoiding paying any transaction fees when recommending share classes.
Our Managing Director, Justin Dausch, recently addressed Share Class Exams on Ignites where he stated that the SEC is now looking at every single mutual fund recommendation, and if they are not in the lowest share class, you better have a good explanation why.
Justin also provided recommendations to Investment Advisers regarding share class review noting:
- Investment Advisers should review which share classes their clients are in twice a year, or even quarterly, depending on volume.
- Before they move clients into different share classes, they should consider whether the distributor charges a fee to switch share classes, and whether that outweighs the savings of switching.
- Advisers should also make sure to clearly communicate to investors when they are recommending they change share classes.
To view the full statements made from Justin on share class exams, click the button below.
Brief Synopsis Of The SEC Fine
It was found that from 2014-2019, a Registered Investment Adviser (“RIA”) invested certain clients’ assets in higher-cost mutual fund share classes than were otherwise available while failing to disclose the conflicts of interest associated with those investment recommendations.
Among other services, the RIA offered a wrap program option to its advisory clients. The RIA was responsible for paying client trading costs under its arrangement with clients in wrap accounts. This included transaction fees on mutual fund investments as part of the overall management fee clients paid by the RIA.
The RIA avoided incurring transaction fees for some client transactions by recommending mutual fund share classes from a no transaction-fee program that charged fees pursuant to Rule 12b-1, often instead of lower-cost share classes of the same fund that were available to clients for a transaction fee.
By investing clients in no-transaction fee share classes, the RIA avoided paying transaction fees on client trades of these mutual funds and did not receive any of these 12b-1 fees.
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