Human Capital

The people shaping the financial regulatory landscape

Melanie Waddell

Feb 01, 2019

Welcome back to Human Capital! I’m Melanie Waddell in Washington, where this week we zero in on the clampdown by the Securities Exchange Commission and Financial Industry Regulatory Authority on advisors’ and broker-dealers’ share class recommendations. The issue: recommending shares that carry the long-maligned 12b-1 fee over shares that don’t.

Thanks for tuning in again this week as we highlight the movers and shakers shaping the financial services regulatory landscape.

In the spotlight this week: Susan Schroeder, head of FINRA’s enforcement division, who fired the latest 12b-1 fee salvo on Monday to address her concerns that customers of 529 plans are being steered to share classes “that are inconsistent with the accounts’ investment objectives.”

Keep reading to see how industry attorneys and compliance gurus are weighing in on the regulators’ share class crackdown and what advisors and broker-dealers should be doing to ensure compliance.

Don’t forget to reach out to me at with your ideas and feedback.


Susan Shroeder's Share Class Salvo

To be eligible for FINRA’s 529 Plan Share Class Initiative, BDs must self-report violations by noon on April 1. FINRA’s goal: “to promptly remedy” potential supervisory and suitability violations.

Schroeder says FINRA has learned “through the course of reviewing some firms’ 529 plan sales that this can be a blind spot for some firms.” If firms self-report via the initiative, she said, “a settlement under this initiative would be a supervisory settlement and would not trigger” a statutory disqualification.

“Firms that take a look at their supervision and deficiency are invited to self-report to us and work with us on developing a plan to make restitution to impacted customers,” Schroeder said. In return: FINRA will “recommend a settlement that includes restitution to customers, but no fine.”

As Brian Rubin, a partner at Eversheds Sutherland in Washington, told me recently “FINRA appears to be copying from the SEC’s playbook regarding mutual fund share class disclosures.”

The SEC’s exam division launched its share class disclosure initiative in 2016, and as soon as SEC Chairman Jay Clayton came aboard in mid-2017, the agency launched the Retail Strategy Task Force within the SEC’s Enforcement Division.


It’s this task force that’s “been focused on potential violations of the securities laws that harm retail consumers, such as a large number of 12b-1 cases that are expected to be announced soon,” said David Tittsworth, the former head of the Investment Adviser Association who’s now an attorney at Ropes & Gray in Washington.

The Wall Street Journal reported Thursday that more than 50 investment advisors are “under pressure” to settle SEC charges of selling higher-fee mutual funds over cheaper versions.


“These share class cases show the continued move away from the broker model,” Todd Cipperman, head of Cipperman Compliance Services, told Human Capital.

Ultimately, financial professionals must get compensated or “they won’t work on behalf of the retail investor,” Cipperman argues. The share-class cases “suggest that the SEC wants upfront, transparent disclosure,” and “harken the end of 12b-1 fees and other revenue-sharing practices.”

The likely result? Advisors will charge “a higher upfront asset-based advisory fee and then scour the investing world for the lowest cost ETFs,” Cipperman opines. The ultimate outcome “will reduce the number of retail investors with access to a financial advisor, thereby pushing them to direct purchases or to robo-advisors.”

Who else will be hurt? “Active managers who must charge more than index funds,” Cipperman adds.

What should advisors do? “Forgo any type of revenue sharing, even if fully disclosed, because of the potential conflict of interest,” Cipperman advises.


Allison Charley, senior principal consultant at ACA Compliance Group and a former SEC examiner, said that advisors and BDs should start by updating all disclosure documents dealing with mutual fund sales to include “conflicts of interest associated with 12b-1 fees for various fund classes.”

Also, firms should take advantage of tools such as FINRA’s Fund Analyzer to compare various funds and share classes. “It is a comprehensive tool that explains all the costs associated with buying and owning shares.”

Then share the info with clients, she said, because it “makes for more-informed decisions and potentially offers RIAs and BDs more protection, especially if such analysis is maintained with written client acknowledgement in a client’s file.”


What They Said

“Privacy will be an extremely hot issue in 2019 and will be a major focus of regulators and legislators” this year.

Kathleen Benway, a newly christened partner at Wilkinson Barker Knauer LLP in Washington.


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