files in filing cabinet with word disclosure on top While the FAQ reminds of the need tofully disclose all conflicts, it also underscores the need to beconcise on Form ADV filings. (Photo: Shutterstock)

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Last week, the Securities and Exchange Commission released adocument on frequently asked questions regarding fiduciaryadvisors' disclosure requirements on their compensation.

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The latest guidance comes on the heels of the SEC's Share ClassSelection Disclosure Initiative, run by the Commission's Divisionof Enforcement, which allowed fiduciary advisors to self-reportfailures to disclose 12b-1 compensation on investmentrecommendations.

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The Initiative resulted in settled charges against 79 firms, andthe disgorgement of $125 million in compensation, most of whichwill be returned to investors, according to the SEC.

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The FAQ notes that firms' Form ADV filings instruct advisers todisclose "sufficiently specific facts" to inform clients ofconflicts of interest, and "may require an adviser to disclose'information not specifically required by' the Form," according tothe FAQ.

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That means disclosure may require "more detail" than Form ADVrequires, the SEC said.

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Importantly, simply disclosing that an adviser "may" have aconflict of interest is not sufficient disclosure when a conflictactually exists.

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Fully disclosing the practice of recommending share classes with12b-1 fees is necessary, even if that practice only represents aminority of the adviser's assets under management.

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"An adviser must disclose if it or its supervised personsaccepts sales compensation, including asset-based sales charges orservice fees," according to the FAQ, "including information aboutthe conflict, how the adviser addresses the conflict and whetherthe adviser offsets the compensation against its advisoryfees."

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While the FAQ reminds of the need to fully disclose allconflicts, it also underscores the need to be concise on Form ADVfilings. "Longer disclosures may not be better disclosures," theSEC says.

Examples of material facts that need to be disclosed

The necessary disclosure obligations when multiple share classesof the same mutual fund are available are "well established," theFAQ says.

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The FAQ provides several examples of the kind of material factsthat need to be disclosed.

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Those facts include the existence and the effect of differentadviser incentives and the resulting conflicts, the nature of theconflicts, and how the adviser addresses the conflicts.

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Advisers also have to disclose compensation from third-partycustodians of clients' assets, the FAQ says.

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Compensation from clearing brokers for recommendations onno-transaction-fee mutual fund share classes should also bedisclosed, "in the staff's view," the SEC says.

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As with 12b-1 fees, simply disclosing that an adviser "may" havea conflict with its relationships with custodians and clearingbrokers is not sufficient when the conflicts actually exist.

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When advisers amend previous Form ADVs to account for shareclass recommendations or revenue sharing agreements, advisers arerequired to highlight the changes in the Forms summary of materialchanges, the FAQ says.

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Nick Thornton

Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.