12b-1 Fees in Wrap Accounts Are an SEC Exam Priority in 2022

 Commentary  March 30, 2022 at 07:44 AM  Share & Print

 

What You Need to Know

  • Revenue sharing arrangements are an exam priority.

  • Regulation Best Interest and the Advisers Act fiduciary standard will also be in examiners’ crosshairs.

  • The Division of Examinations completed 3,040 exams in fiscal 2021, a 3% increase from fiscal 2020.

The Securities and Exchange Commission plans to focus its exams this year on RIAs’ use of 12b-1 fees in wrap fee accounts where the RIA may be responsible for paying transaction fees, along with revenue sharing arrangements.

The agency’s just-released exam priorities for 2022 state that RIA exams will focus on whether advisors “are acting consistently with their fiduciary duty to clients, looking at both duties of care and loyalty, including best execution obligations, financial conflicts of interest and related impartiality of advice, and any attendant client disclosures.”

The top focus areas include:
 

– revenue sharing arrangements;

– recommending or holding more expensive classes of investment products when lower cost classes are available (e.g., RIAs that recommend no-transaction-fee mutual fund share classes that have 12b-1 fees in wrap fee accounts where the RIA may be responsible for paying transaction fees;

– recommending wrap fee accounts without assessing whether such accounts are in the best interests of clients, including the impact of the move to zero commissions on certain types of securities transactions by a number of broker-dealers; and

– recommending proprietary products resulting in additional or higher fees.

In fiscal 2021, the Division of Examinations completed 3,040 exams, a 3% increase from fiscal 2020 and about on par with pre-COVID-19 pandemic examination totals in fiscal 2019.

This year, the SEC states, it will also assess the adequacy of RIAs’ compliance policies and procedures to address conflicts and ensure advice in the best interest of clients, including the cost of investing; and disclosures to enable investors to provide informed consent.

Reg BI/Advisers Act Fiduciary Standard

Standards of conduct issues for broker-dealers and RIAs, with a focus on how they are satisfying their obligations under Regulation Best Interest and the Advisers Act fiduciary standard, are also a top exam priority.

Exams will assess practices regarding: consideration of alternatives (e.g., with regard to potential risks, rewards, and costs); management of conflicts of interest (e.g., incentive practices that favor certain products or strategies over others); trading (e.g., RIA best execution obligations); disclosures (e.g., disclosures provided in Form ADV and Form CRS and made pursuant to Reg BI), account selection (e.g., brokerage, advisory, or wrap fee accounts); and account conversions and rollovers.

“For both broker-dealers and RIAs, examinations will focus on the effectiveness of compliance programs, testing, and training that are designed to support retail investors and working families receiving recommendations and advice in their best interests,” the SEC said.


European Compliance Association

European Compliance Association

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