Unlike TV and Movies, RIAs Cannot Solve Post-Production Compliance Issues | before


In an article by The New York Times on August 22, 2021, a doctor who is also a co-producer of a televised medical drama, discussed the phrase, “We can fix it in the mail.” Whenever a medical term was mispronounced or an inaccurate image was displayed on a CT scanner, other producers on the TV show assured the doctor that the error could be corrected in post-production. The doctor wanted her and her patients to have another chance to make different medical choices and “fix it later.” Likewise, Registered Investment Advisers (“RIAs”) will not have the opportunity to re-do their compliance errors and correct them by mail.

RIAs will not be able to correct their failure to disclose by mail

In recent months, the SEC has taken legal action against RIAs who failed to fully and fairly disclose their conflicts of interest. Investment advisers are required to disclose all material facts to advisory clients that could affect their advice, including any conflict of interest between the company, associates and their clients. Disclosures should be specific enough that clients can understand the advisor’s conflicts of interest. Full disclosure ensures that clients have an informed basis on which to consent or reject conflicts of interest.

On August 24, 2021, the SEC filed a lawsuit against an RIA in Warren, Pa., Which failed to disclose the conflicts of interest. The RIA has advised some clients as part of its package fee program to buy or hold classes of mutual fund shares that charge 12b-1 fees, even though classes of shares to lower cost of those same funds were available. Although the RIA did not collect the 12b-1 fee, the company benefited from selecting the most expensive mutual fund share classes because it avoided the transaction fees it would otherwise have. had to pay.

For four years, the RIA made no disclosure in its overhead program brochure regarding 12b-1 fees or the conflict of interest associated with its selection of mutual fund share classes. When the AIR finally disclosed its mutual fund share class selection practices, the disclosure was inadequate.

Without a doubt, the RIA would have liked to correct its disclosure errors before the company came under scrutiny by the SEC’s Division of Enforcement. The RIA was ordered to pay restitution and pre-judgment interest in the amount of $ 902,500 in addition to other penalties. The execution measure can be examined here.

On August 25, 2021, an RIA in Tampa, Florida paid the price for its own disclosure errors. The company allegedly breached its fiduciary duty in its mutual fund stock selection practices. These practices resulted in an unaffiliated broker receiving three types of commissions on investments from RIA clients. The fees paid to the broker benefited the RIA as there was an agreement to share the expenses between the companies. The RIA paid the broker a lower fee because it recommended that share classes charge higher fees to clients. The SEC determined that the information provided by AIR was not specific enough. As a result, clients would not be able to understand any conflicts of interest arising from RIA’s advice regarding investing in different classes of mutual fund or money market fund shares. The execution measure can be found here.

Correct your disclosures before the examiners arrive

Instead of dealing with compliance issues after the fact, investment advisers should pay more attention to detail when making disclosures. The Division of Investment Management’s responses to Frequently Asked Questions (“FAQs”) regarding the disclosure of certain financial disputes relating to RIA indemnification, which are available here.

According to the FAQs, SEC review staff have observed, and application cases have illustrated, that RIAs have not always adequately addressed these conflicts of interest. While the FAQ analyzes disclosure obligations in the context of compensation, such as 12b-1 fees and revenue sharing, many of the same disclosure principles and obligations apply to other forms of compensation such as :

  • Direct or indirect receipt by a RIA of service fees from its clearing broker;
  • Marketing support payments from an investment advisor of a mutual fund;
  • Transaction fees; Where
  • Receiving payments from a mutual fund investment advisor to help defray the cost of educating and training company staff on certain investment products.

An advisor should consider both their general disclosure obligations as a trustee, as well as the specific disclosure requirements of Form ADV. RIAs should eliminate or at least provide full and fair disclosure of any conflicts of interest that could cause them, knowingly or unknowingly, to give advice that is not selfless.


While RIAs cannot resolve all compliance issues by mail, they have the ability to correct past mistakes. Since disclosure gaps often go hand in hand with weak policies and procedures, RIAs may review and strengthen their compliance program during their annual review of the corporate compliance manual. During the annual review process, RIAs can ensure that they have fully and accurately disclosed all conflicts of interest. For example, it would be inaccurate to disclose that a conflict of interest “may” arise when it already exists.

Some RIAs have had the opportunity to “fix the problem by mail”. When reviewers send them a deficiency letter, counselors must promptly correct errors reported by the review team. Where an RIA fails to address these compliance deficiencies in a timely manner, examiners will consider referring the adviser’s case to the Enforcement Division.

On July 26, 2021, the SEC announced that twenty-one AIRs had failed to file and deliver their customer relationship summary, known as Form CRS, to their retail investors. RIAs were to deliver the information document to potential and new customers by June 30, 2020 and to existing customers by July 30, 2020. They were also required to post their current CRS form on their website. The SEC concluded that these AIRs did not meet these requirements until they were reminded twice deadlines missed by the Examinations Division of the SEC.

RIAs should never rely on the SEC to remind them, even once, of a compliance deadline and give them a chance to correct their mistake. Unlike TV shows where errors and inaccuracies can be corrected after the fact with precise editing, consumer-generated imagery and special effects, flaws in compliance programs are likely to become a harsh reality for RIAs.


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