The Friday List: 10 Types of Prohibited Revenue Sharing

Today, we offer our “Friday List,” an occasional feature summarizing a topic significant to investment management professionals interested in regulatory issues.  Our Friday Lists are an expanded “Our Take” on a particular subject, offering our unique (and sometimes controversial) perspective on an industry topic.

Recently, we declared that revenue sharing was dead.  Although, in theory, sufficient disclosure should allow advisers to receive revenue sharing, in practice, the SEC attacks revenue sharing in all its forms regardless of the extent of the disclosure.  Our conclusion is that the SEC has effectively banned revenue sharing.  As support for our position, below are ten types of revenue sharing outlawed by the SEC (cases hyperlinked).

10 Types of Prohibited Revenue Sharing

1. 12b-1 Payments from Recommended Funds.  An adviser compounds the violation when lower expense share classes are available.
2. A percentage of the GP’s carried interest.  Advisers cannot make backdoor compensation from a private fund GP.
3. A percentage of the management fee.  Platforms have required both registered and private funds to kick back a portion of the management fee to obtain shelf space.
4. Up-front payment from a fund sponsor.  A one-time, up-front or back-end payment from a product sponsor can also raise questions about required broker-dealer registration.
5. Directing clients to affiliated brokers.  The SEC will punish this form of revenue sharing where it can prove that clients could have obtained better execution through a non-affiliate.
6. Revenue-splitting with clearing brokers/custodians.  The SEC will attack firms that receive a portion of the ticket charge, commission, or other fees from clearing brokers or custodians.
7. Internal allocations among affiliates.  Just because revenue sharing is hidden through internal accounting doesn’t make it less of a conflict of interest.
8. Fees from recommended vendors.  Advisers must put the client first and should not recommend vendors that pay them or offer discounts.
9. Sub-transfer agent or administrative fees.  The SEC has cracked down on so-called sub-TA fees ostensibly paid to reimburse advisers for client servicing.
10. Forgivable loans from clearing brokers.  It’s a conflict of interest when reps have an incentive to steer business to a particular clearing broker to reduce loan principal.