Dual Registrant Failed to Disclose Revenue Sharing

A large dual registrant agreed to pay over $550,000 in disgorgement, interest and fines for failing to disclose mutual fund revenue sharing received from its clearing broker.  The clearing broker agreed to share a percentage of revenues received from mutual funds participating in its NTF program.  The SEC charges that this revenue sharing created a conflict of interest whereby the IA/BD had a financial incentive to direct clients to certain funds.  The SEC faults the IA/BD for failing to disclose the revenue sharing or the conflict of interest in its Form ADV from 2003 to 2014.  The SEC also claims best execution violations in addition to violations of the compliance rule (206(4)-7) for failing to adopt policies and procedures ensuring proper disclosure.

OUR TAKE: The SEC case focuses on failed disclosure and conflict of interest, but the SEC does not present any data showing that the respondent actually invested more in the funds where it received revenue sharing.  The SEC does not need to show client harm in order to bring a case for failed disclosure or a weak compliance program.