“We are not resting on the success of the share class initiative,” Avakian said, referencing the agency’s wildly successful self-reporting program that has resulted in 95 broker-dealers returning some $135 million in mutual fund fee overcharges to investors.
“Let me assure you, we are looking for other undisclosed material conflicts—and we are finding them,” Avakian added.
These types of cash sweep arrangements create an “obvious incentive” for an advisor to recommend products where revenue sharing will result in larger payments to the advisor and lesser returns for the advisor’s client, she said.
“This is a clear conflict, and without full and fair disclosure, investors cannot make an informed investment decision to agree to the advisor’s cash sweep vehicle selection,” Avakian added.
“When we find those circumstances, we are asking: Has the advisor explained the conflict to the client? Does that explanation cover how the conflict may affect the recommendation? Does the client have sufficient information to make an informed decision?” the SEC enforcement official said.
“I will tell you: The more we look, the more undisclosed or inadequately disclosed financial conflicts we find,” Avakian said. “So I thought I would share with you some of what we have seen.”
She suggested firms and advisors think like SEC examiners and ask themselves the following questions in order to proactively disclose or mitigate costly conflicts of interest:
- Are there other areas where advisors might have a financial or other incentive to recommend a particular product to an investor?
- Is the advisor making money at the investor’s expense? Is the client paying more for this product?
- Is the same product available for less or no cost to the client? Is a substantially similar product available for lower or no cost?
- Can investors figure out how much they are paying?
“Advisors need to be proactive in evaluating how changes to their business affect their disclosure obligations. They also need to take action once a conflict is identified,” Avakian concluded.