Still, the complaint against the $85 billion IBD with over 300,000 clients is notable in several respects not least of which is the risks and benefits of self reporting, Bernstein said. “First, the adviser self-reported to and settled with the SEC under the SCSD Initiative,” Bernstein said.
The SEC’s Division of Enforcement warned at the time it announced the initiative that it would recommend stricter penalties for advisers that were eligible to participate in the program, but did not self-report. It also warned that an enforcement action could be taken if other potential misconduct was uncovered.
“This complaint appears to confirm these warnings and suggests that advisors that self-reported likely received no leniency in connection with conduct outside of the four corners of the Initiative,” Bernstein said.
In fact, the SEC’s Division of Enforcement has sent requests to firms–including those that have self-reported – seeking documents and data regarding their revenue sharing practices and disclosures securities attorneys have told the IAA, Bernstein said.
“As this case unfolds, it will be interesting to learn whether there was a relationship between the advisor’s self-reporting under the SCSD Initiative and the investigation relating to the advisor’s revenue sharing and whether any conclusions can be gleaned about the potential benefits and risks of participating – or declining to participate – in a voluntary self-reporting initiative,” she said.
What is more certain is the complaint is a clear signal of the SEC’s expectations around disclosure of revenue sharing arrangements and the incentives they create for B-Ds and advisors.
While RIAs have used the word “may” to disclose potential conflicts of interest for years, that may no longer work, Bernstein said.
“It ‘may’ not be enough for an advisor simply to remove the word ‘may” from its disclosures, and it 'may’ not be enough to have policies that require identification and disclosure of conflicts unless the advisor also adopts and implements procedures that are sufficiently specific to connect the identification of the conflicts to their adequate disclosure.
Commonwealth initially disclosed in its Form ADV brochure that a portion of a fee paid to the firm’s clearing broker by mutual funds that participated in one of the adviser’s programs “is” – not “may be” – shared with the advisor. But this disclosure, in the SEC’s view, did not go nearly far enough.
According to the SEC, the disclosure did not sufficiently describe the circumstances under which payments were received or state that different funds or share classes were more or less expensive. As a result, the SEC said the conflicts of interest presented by this set of circumstances were allegedly not disclosed.