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SEC Issues FAQs on Adviser Conflict Disclosure Practices

On October 18, 2019, the SEC’s Division of Investment Management issued guidance in the form of Frequently Asked Questions that address certain matters regarding the disclosure of conflicts of interest involving the receipt by investment advisers of certain types of compensation, including 12b-1 fees, service fees, marketing support payments and other forms of revenue sharing by advisers and their affiliates and/or associated persons. The FAQs should be read in the context of the SEC’s continued focus on conflicts of interest, particularly through the adoption of Form CRS and the SEC’s recent focus on advisers’ share class selection practices and receipt of 12b-1 fees through the Share Class Selection Disclosure Initiative. The FAQs address the conflicts of interest presented by these compensation arrangements and related disclosure obligations required under an adviser’s fiduciary duties and Form ADV.

Key takeaways from the FAQs are as follows:

  • Fiduciary duty principles and SEC guidance require an adviser to disclose in its Form ADV any compensation the adviser receives, directly or indirectly, in connection with its advisory activities.

  • Compensation received by an adviser includes the receipt of payments as well as “the reduction or avoidance of expenses that an adviser incurs or otherwise would incur.”

  • If a conflict of interest exists, an adviser’s fiduciary duties require the adviser to disclose the existence of the conflict, the nature of the conflict and how the adviser addresses the conflict.

  • The SEC staff continues to caution against the use of the word “may” in situations in which a conflict actually exists or a business practice is actually followed. For example, in situations in which a conflict or practice applies only to a subset of clients, the adviser must specifically explain that a conflict exists and the circumstances that make the conflict applicable and identify the types of clients impacted. In this case, it would not be sufficient to note that the adviser “may” have a conflict of interest.

  • Because market practices are constantly evolving, advisers are encouraged to proactively review their practices periodically to identify new or changing conflicts of interest.

  • If an adviser materially amends or supplements its disclosures concerning share class recommendations or revenue-sharing arrangements, the adviser is required to highlight the amendments in Item 2 (“Material Changes”) in its Form ADV Part 2.

The FAQs are available here.

© 2020 Vedder PriceNational Law Review, Volume IX, Number 322


About this Author

Legal, Business, John Marten, Investment Attorney, Vedder Price Law FIrm

John S. Marten, a Shareholder in the Chicago office of Vedder Price, has substantial experience representing clients in the investment management industry.

As a member of the firm’s Investment Services group, Mr. Marten counsels clients on a wide variety of matters involving the application of the federal securities laws to investment companies, investment advisers and broker-dealers. He has significant experience counseling investment company clients with respect to new products and was recently involved in the creation of two mutual funds...

(312) 609 7753
Nathaniel Segal, Investment Attorney, Vedder Price Law Firm

Nathaniel Segal is an Associate at Vedder Price and a member of the Investment Services group. He focuses his practice on investment companies and investment advisers in connection with the organization and operation of investment products and services, including traditional mutual funds, closed-end investment companies (including interval funds and listed closed-end funds), variable insurance products and registered hedge funds, as well as mutual funds utilizing complex hedging and absolute return strategies. Mr. Segal has experience in conducting transactional due diligence and drafting regulatory disclosures in connection with fund reorganizations and management acquisitions. He counsels clients on a wide variety of regulatory matters, including interpretive and no-action letter requests and SEC exemptive orders, as well as governance matters and internal compliance procedures in response to SEC examinations and inquiries.

(312) 609 7747
Jacob Tiedt, Vedder Price, investment services attorney

Jacob C. Tiedt is a Shareholder at Vedder Price and a member of the Investment Services group.

Mr. Tiedt’s practice includes the representation of registered mutual funds, closed-end funds and exchange-traded funds; private funds; investment advisers; and other financial institutions on a broad range of regulatory, governance and compliance matters. Mr. Tiedt regularly counsels clients on matters relating to SEC registration, disclosure and compliance; shareholder solicitation; NYSE, Nasdaq and FINRA regulation; corporate governance; and board administration. Mr....

Jeff VonDruska Investment Services Lawyer Vedder

Jeff VonDruska is an Associate in the Chicago office of Vedder Price and a member of the firm’s Investment Services practice group.

His practice includes the representation of investment advisers, family offices, private funds, registered mutual funds, closed-end funds, exchange-traded funds and other financial institutions on a broad range of legal, regulatory, governance, formation, and compliance matters.

Mr. VonDruska has significant experience in regulatory and compliance matters affecting investment advisers,...

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