“Investment professionals occupy positions of tremendous importance to those who entrust them with their children’s college funds, their retirement funds, and other savings, Avakian said. “One such responsibility — long recognized under federal law — is an adviser’s fiduciary obligation to disclose to their clients material conflicts of interest. Disclosure of such conflicts remains a priority. The importance of such disclosures is illustrated by the Share Class Selection Disclosure Initiative (Share Class Initiative) that we concluded during Fiscal Year 2020.”
The initiative resulted in the SEC ordering nearly 100 dually-registered advisory firms that voluntarily self-reported to the Enforcement Division to return more than $139 million to investors.
Other potential undisclosed conflicts can include advisers’ use of cash sweep arrangements. Cash in advisory accounts is often automatically swept into a money market mutual fund or a bank deposit sweep program. In some cases, an adviser that is either dually-registered or has an affiliated broker-dealer has a conflict of interest in recommending one cash investment over another because it receives revenue sharing payments from its clearing broker when selecting particular cash sweep products. Just as with mutual fund share class selections, advisers recommending or choosing between different cash sweep products must make full and fair disclosure of these types of conflicts.
Another potential area of concern for advisory clients is the transparency of fee structures around their accounts. For example, “wrap fee programs” offer accounts in which clients pay an asset-based “wrap fee” that covers investment advice and brokerage services, including trade execution.
In May 2020, the SEC found that Morgan Stanley Smith Barney had disseminated marketing and client communications that gave the misleading impression that wrap fee clients were not likely to incur additional trade execution costs, even though the firm’s order routing practices resulted in some instances in the clients paying additional transaction fees that were not visible to them. In settling the charges, Morgan Stanley agreed to pay a $5 million penalty and create a Fair Fund to distribute the penalty moneys to harmed investors.
It was also a record year for whistleblowers at the SEC, Avakian said. The Commission issued approximately $175 million in total whistleblower awards to 39 individuals, a 200% increase in number of individuals awarded in a single year over the next-highest year. In the brief time since the Fiscal Year ended, the Whistleblower Program has continued to achieve new milestones, as the Commission issued the largest award in its history — approximately $114 million to a single whistleblower — on October 22, 2020, Avakian said.