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Unlike TV and Movies, RIAs Cannot Fix Compliance Problems in Post Production

August 31, 2021

compliance problems

Written by:  Les Abromovitz, Senior Director

In an article in The New York Times on August 22, 2021, a physician who is also a co-producer of a TV medical drama, discussed the phrase, “We can fix it in post.” Whenever a medical term was mispronounced or an inaccurate image was shown on a CT scanner, other producers of the television program assured the physician that the mistake could be fixed in post-production. The doctor wished that she and her patients could have another chance to make different medical choices and “fix it in post.” Similarly, Registered Investment Advisors (“RIAs”) will not have the opportunity to redo their compliance mistakes and fix them in post.

RIAs won’t be able to fix their disclosure failures in post

In recent months, the SEC has brought enforcement actions against RIAs that failed to fully and fairly disclose their conflicts of interest. Investment advisors are required to disclose all material facts to advisory clients that could affect their advice, including any conflicts of interest between the firm, associated persons and their clients. Disclosures must be sufficiently specific, so that clients can understand the advisor’s conflicts of interest. Full disclosure ensures that clients have an informed basis on which to consent to or reject the conflicts of interest.

On August 24, 2021, the SEC brought an enforcement action against an RIA in Warren, Pennsylvania, that failed to disclose conflicts of interest. The RIA advised certain clients in its wrap fee program to purchase or hold mutual fund share classes that charged 12b-1 fees, even though lower-cost share classes of those same funds were available. Although the RIA did not receive the 12b-1 fees, the firm benefited by selecting the higher-cost mutual fund share classes, because it avoided transaction fees that it otherwise would have had to pay.

For four years, the RIA made no disclosures in its wrap fee program brochure relating to 12b-1 fees or the conflict of interest associated with its selection of mutual fund share classes. When the RIA finally did disclose its mutual fund share class selection practices, the disclosure was inadequate.

Undoubtedly, the RIA would have liked to correct its disclosure mistakes before the firm was under scrutiny by the SEC’s Division of Enforcement. The RIA was ordered to pay disgorgement and prejudgment interest in the amount of $902,500 in addition to other sanctions. The enforcement action can be reviewed here.

On August 25, 2021, an RIA in Tampa, Florida, paid the price for its own disclosure mistakes. The firm allegedly breached its fiduciary duty in connection with its mutual fund share selection practices. Those practices resulted in an unaffiliated broker-dealer receiving three types of fees from the RIA’s clients’ investments. The fees paid to the broker-dealer benefited the RIA because there was an expense sharing agreement between the firms. The RIA paid lower fees to the broker-dealer, because it recommended share classes charging higher fees to clients. The SEC determined that the RIA’s disclosures were not sufficiently specific. Therefore, clients would not be able to understand the conflicts of interest arising from the RIA’s advice about investing in different share classes of mutual funds or money market funds. The enforcement action can be found here.

Fix your disclosures before examiners arrive

Instead of fixing compliance problems after the fact, investment advisors should pay more attention to the details when making disclosures. A good resource is the Division of Investment Management’s answers to frequently asked questions (“FAQs”) regarding disclosure of certain financial conflicts pertaining to RIA compensation, which is available here.

According to the FAQs, SEC examination staff have observed, and enforcement cases have illustrated, that RIAs have not always appropriately addressed these conflicts of interest. Although the FAQs analyze disclosure obligations in the context of compensation such as 12b-1 fees and revenue sharing, many of the same principles and disclosure obligations apply to other forms of compensation such as:

  • An RIA’s direct or indirect receipt of service fees from its clearing broker-dealer;
  • Marketing support payments from a mutual fund’s investment advisor;
  • Transaction fees; or
  • Receipt of payments from a mutual fund’s investment advisor to help defray the cost of educating and training the firm’s personnel regarding certain investment products.

An advisor must consider both its general disclosure obligations as a fiduciary, as well as the specific disclosure requirements in Form ADV. RIAs must eliminate or at least provide full and fair disclosure of all conflicts of interest that might cause them, consciously or unconsciously, to render advice that is not disinterested.


Although RIAs cannot fix every compliance problem in post, they do have opportunities to correct past mistakes. Since disclosure deficiencies often go hand-in-hand with weak policies and procedures, RIAs can revise and strengthen their compliance program during their annual review of the firm’s compliance manual. During the annual review process, RIAs can make certain 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 been given the chance to “fix it in post.” When examiners send them a deficiency letter, advisors should quickly correct the mistakes pointed out by the examination team. When an RIA fails to address those compliance deficiencies in a timely manner, examiners will consider referring the advisor’s file to the Division of Enforcement.

On July 26, 2021, the SEC announced that twenty-one RIAs failed to file and deliver their client relationship summary, known as Form CRS, to their retail investors. The RIAs were required to deliver the disclosure document to prospective and new clients by June 30, 2020, and to existing clients by July 30, 2020. They were also required to post their current Form CRS on their website. The SEC concluded that these RIAs failed to satisfy these requirements until they were reminded twice of the missed deadlines by the SEC’s Division of Examinations.

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




This article is not a solicitation of any investment product or service to any person or entity. The content contained in this article is for informational use only and is not intended to be and is not a substitute for professional financial, tax or legal advice.