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SEC Puts RIAs on Notice Regarding Share Class Recommendations

The Securities and Exchange Commission has launched an initiative to identify situations where RIAs have recommended share classes with “substantial loads or distribution fees.”

The initiative, according to a risk alert issued July 13 by the regulator’s Office of Compliance Inspections and Examinations (OCIE), is seeking to identify conflicts of interest tied to advisers’ compensation or financial incentives for recommending mutual fund and 529 plan share classes that have substantial loads or distribution fees. The notice identifies examples of conflicts of interest related to share class recommendations as those including situations where:


  • the adviser is also a broker-dealer or affiliated with a broker-dealer that receives fees from sales of certain share classes, or

  • the adviser recommends that clients purchase more expensive share classes of funds for which an affiliate of the adviser receives more fees.


The notice acknowledges that the SEC has previously stated that an investment adviser has failed to uphold its fiduciary duty when it causes a client to purchase a more expensive share class of a fund when a less expensive class of that fund is available.

According to the OCIA, staff will focus on the adviser’s practices related to share class recommendations and compliance oversight of the process. The regulator will also review advisors’ compliance programs as they relate to mutual fund share classes, the OCIE says.

In sharing the primary focus areas for the share class initiative, OCIE says it “encourages advisers to reflect upon their own practices, policies, and procedures in these areas and to make improvements in their advisory compliance programs where necessary.”

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