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SEC’s OCIE Announces Share Class Examination Initiative

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July 14, 2016

Client Alert
The Securities and Exchange Commission’s (“SEC”) Office of Compliance Inspections and Examinations (“OCIE”) recently issued a Risk Alert announcing that they will be undertaking an examination initiative focused on the risk that registered advisers may be making conflicted recommendations to their clients. OCIE announced that their examinations will likely focus on the following in connection with advisers’ mutual fund and 529 Plan share class recommendation practices: (1) fiduciary duty and best execution; (2) disclosures; and (3) compliance programs. A copy of OCIE’s Risk Alert is available here.

Background

OCIE’s Examination Priorities for 2016 include examining matters of importance to retail investors. For a summary of OCIE’s 2016 Examination Priorities see our Client Alert available here. OCIE indicated in its Risk Alert that this share class examination initiative is being undertaken pursuant to this priority.

Share Class Examination Initiative

The OCIE staff intends to focus its examination on certain investment advisers and their associated persons that may be receiving undisclosed compensation or other financial incentives. Specifically, OCIE is seeking to identify conflicts of interest tied to advisers’ compensation or financial incentives for recommending mutual fund and 529 Plan share classes that have substantial loads and/or distribution fees. OCIE notes two examples of potential conflicts of interest related to share class recommendations:

The OCIE staff will focus its examination on adviser practices related to:

While these are the primary focus items for the examinations, the Risk Alert notes that examiners may select additional topics based on other risks identified during the examinations.

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