OCIE Launches Share Class Initiative

The SEC’s Office of Compliance Inspections and Examinations has issued a Risk Alert announcing its Share Class Initiative, which will examine how advisers recommend mutual fund and 529 share classes.  The Risk Alert indicates that the exam staff will review whether an adviser has satisfied its fiduciary duty and best execution obligations when recommending a more expensive share class when a less expensive share class of the same fund is available.  OCIE will also scrutinize load and distribution compensation received through affiliates and whether such compensation arrangements are properly disclosed in Form ADV Part 2.  Also, the exam staff will review relevant compliance policies and procedures concerning the share class selection and recommendation process.  In the Risk Alert, OCIE “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.”

OUR TAKE: Compli-pros should review any recommendations of share classes that carry a load or distribution fee (including 12b-1 or shareholder servicing fee).  An adviser who recommends such share classes will have the burden of defending why it didn’t recommend a less expensive share class.