June 19, 2020

Jim Lundy Shares Insight on SEC’s Increased Scrutiny of Revenue Sharing

In the article, “Borzi challenges SEC to use Reg BI to attack revenue sharing conflicts,” InvestmentNews covers a recent challenge by Phyllis Borzi, the architect of a now-defunct Labor Department investment advice rule, as it relates to Regulation Best Interest (Reg BI) and revenue sharing. InvestmentNews turned to partner Jim Lundy for his input on the SEC’s approach to revenue sharing under the soon to be implemented regulation.

The publication reports that over the last two years, the SEC has been cracking down on inadequate disclosure of 12b-1 fees through its share class selection initiative. That effort has focused on problems the SEC has found on the use of funds with 12b-1 fees in advisory accounts. The targets of the sweep were mostly registered as both brokerages and advisory firms.

Lundy told InvestmentNews that he has noticed increased SEC scrutiny of revenue sharing. The SEC probe of 12b-1 fees on the advisory side of dual registrants’ operations, but has since evolved into similar investigations of revenue sharing payments to investment advisory firms. Further, the SEC may continue and expand its focus on in this area in the brokerage industry after Reg BI goes into effect on June 30.

“You don’t want to suffer the same fate on the brokerage side of the house post-Reg BI,” Lundy said. “We’re telling our clients to be as explicit as possible about conflicts of interest and the disclosures related to those conflicts.”

In defense of revenue sharing, Lundy argued that the payments aren’t taken directly out of investors’ pockets: It’s money that is exchanged between funds and financial firms.

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