SEC to scrutinize novel revenue sharing arrangements

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WASHINGTON -- The SEC is growing wary of new forms of compensation that some advisors and brokers are pursuing amid the "race to zero" in fees and commissions, warning that the agency is scrutinizing novel revenue-sharing agreements.

Senior officials with the commission's enforcement and examination divisions are also serving notice that they are on the hunt for repeat offenders and advisors who steered clients toward pricey mutual fund shares but failed to come forward under the agency's self-reporting initiative.

Emerging compensation arrangements figure to become a significant new frontier for both the enforcement and examination division, senior officials told compliance professionals at the Investment Adviser Association's annual conference.

Looking ahead, enforcement Co-Director Steven Peikin indicated that his office will look closely at cash sweeps and new revenue-sharing arrangements that advisors and brokers are forming. Peikin urged firms to ensure that any new lines of revenue remain complaint with advisors' fiduciary duties and other applicable regulations.

"If you look out [and] project over the next year or so I expect to see enforcement recommendations ... in all those spaces," he said. "If there's one area that folks in this room should be attending to, it's that."

The outlook is similar at the Office of Compliance Inspections and Examinations, where compensation and conflicts of interest are a perennial priority. OCIE Director Peter Driscoll said that his team is examining how firms are making up for not charging commissions.

"I'm waiting for the first firm to come out with the slogan, 'You get what you pay for,'" Driscoll said.

The SEC is also cautioning that it has little patience for advisors who were cited for compliance failures in the past and failed to fix them, or for those who were given a chance to come forward when they were given an opportunity to self-report overcharging clients.

"If we've identified something and a firm says they're going to fix it and they don't fix it," Driscoll said, "it just is really bad, and particularly if it leads to harm to an investor or a client."

On the enforcement side, the SEC is wrapping up favorable settlements with the last of the firms that voluntarily reported selling high-cost mutual fund shares when a lower-priced option was available.

But Peikin cautions that his team is still on the hunt for firms that didn't come forward in the share-class initiative.

"What you will see is cases — both litigated and settled — against advisors who were eligible to self-report but chose not to, and we have pretty good ability to identify people who were eligible to self-report but elected not to participate in the program," he said.

And when enforcement authorities find those firms, Peikin cautioned that they will "recommend much harsher terms of settlement and seek more relief in litigation."

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