Is Past Really Prologue When It Comes to Your Mutual Fund Share Class Selection, Conflicts, and Disclosures?

Did Shakespeare get it right? Let us help you put the past in the past.

“What’s past is prologue.” This line from Shakespeare’s “The Tempest,” written over 400 years ago, has come to mean that history can provide context for events happening today.

About four (not 400) years ago, we reported on a discussion forum on SEC examination and enforcement initiatives where the OCIE Director expressed concern that their warnings related to appropriate share class recommendations and other related forms of compensation were not being heeded despite numerous enforcement actions, settlements, and repeated statements that mutual fund share class selection, conflicts, and disclosure were an important regulatory priority.

• Recently, FINRA Enforcement concluded a matter involving a major financial services firm with a large fine, finding that clients purchased Class C mutual funds when Class A shares were available at substantially lower costs. Jessica Hopper, EVP & Head of FINRA’s Department of Enforcement reminded and encouraged firms to “proactively detect, fix, and remediate these types of supervisory issues.”

 

•  A few months ago, the SEC settled charges against a registered investment adviser (“RIA”) for a breach of fiduciary duty to its advisory clients as a result of investing wrap fee clients in higher cost mutual fund share classes then were otherwise available while failing to disclose conflicts of interest associated with those investment recommendations. The SEC concluded that the RIA breached it duty of care, including its duty to seek best execution, by causing wrap fee clients to invest in fund share classes that charged 12b-1 fees when share classes of the same funds presented a more favorable value to clients.

These are just two examples of this type of regulatory action—there are more. So, is past inevitably prologue, or can we truly leave it in the past?

Yes, William Shakespeare, the past can still be prologue, but Bates can help clients put the past in the past.

We have provided consulting support to clients and counsel on over 70 share class and related matters involving fees and other forms of compensation generated by investor mutual fund holdings including revenue sharing, missed rights of reinstatement benefits, annual expense ratios, the 12b-1 subcomponent of those same annual expense ratios, and avoided transaction costs, just to name a few. 

• Bates was retained on behalf of dozens of financial institutions in evaluating whether to self-report under the SEC’s Share Class Disclosure Initiative, as well as by those who reported, and by many who did not report and subsequently found themselves defending investigations and enforcement actions.  
• We have worked with clearing firms to gather required data, conducted a thorough evaluation of instances in which a lower cost share class was available and the client qualified for that lower cost share class, calculated the difference in fees charged, identified exceptions in the population where disclosures were sufficient or another factor justified the share class selected, and provided final reporting numbers for client use with the SEC (after discussion with counsel).  
• We also assisted clients by providing metrics and reporting that contextualized the behavior of specific FAs, branches, account types, and other key indicators.  
• We were also retained by dozens of financial institutions in evaluating whether to self-report under FINRA’s 529 Plan Share Class Initiative, those who reported, and those pursued by FINRA after the close of the Initiative.  
• We worked with plan sponsors to gather required data, identified C-share activity where the beneficiary was less than 12 years of age, evaluated breakpoints and expense ratios offered by the share classes at issue (A and C) to determine the breakeven point wherein C-share investors were potentially harmed, and calculated that harm based on the expense ratio differential. We identified exceptions in the population where the rationale for the C-share purchase was sufficient, and after discussion with counsel provided final reporting numbers for use with FINRA.

In service of these projects, Bates employs a team of programmers who combine subject matter expertise with the ability to process and analyze large amounts of data. Bates has also developed proprietary databases related to historical mutual fund information, including fee rates, etc., which are necessary to support an accurate review of potential harm. And, where necessary, our team of former Supervisors will review suitability determinations made for thousands of individual clients. Bates’ experience allows our clients and their counsel to be confident that they have isolated only those investors who may have incurred harm, and the amount of that harm. That process includes getting the right data and setting it up correctly, identifying ways to reduce the at-issue population, quantifying any available offsets to the damages, reviewing the subject transactions for suitability, and providing final reporting.

Let us help you put the past in the past. Contact us today to learn more: 

David Birnbaum, Managing Director

dbirnbaum@batesgroup.com or  917-273-2682

Alex Russell, Managing Director, White Collar, Regulatory and Internal Investigations

arussell@batesgroup.com or  971-250-4353