The Securities and Exchange Commission (SEC) has fined two RIAs associated with Kestra Holdings more than $10m to settle charges that they failed to disclose conflicts of interest that incentivized them to place client assets into expensive mutual funds when cheaper options were available.
The Commission found that since at least January of 2014, a brokerage firm affiliated with Kestra began receiving revenue sharing payments from an unaffiliated clearing broker tied to client investments in certain mutual funds.
‘As a result of the revenue sharing agreements, Kestra Advisory Services had an incentive to recommend mutual funds and mutual fund share classes that paid the affiliated broker revenue sharing as opposed to those that did not,’ the SEC said.
The SEC said that Kestra failed to disclose the existence of any revenue sharing payments at all to its clients until July of 2016.
As per Reg BI’s Conflict of Interest Obligation and Disclosure Obligation, firms should put a good process in place to identify such conflicts and mitigate them and/or reveal them in disclosures to customers
La Meer Inc. GRACE for Client Management for Reg BI, GRACE for Compliance Management, Trade Monitoring, and Branch and Rep Outside activity monitoring can help establish these processes in firms and help them prevent regulatory violations and reputation damage.