Watchdog looking for documents related to any compensation based on assets held by the financial intermediary
The enforcement division of the US Securities and Exchange Commission (SEC) has started an inquiry into ETF revenue-sharing arrangements, pressing fund companies for details about payments made to brokers and other financial intermediaries.
According to a letter published with BoardIQ, a sister newspaper of the Financial Times, the SEC is looking for papers connected to "any compensation received by an adviser or an ETF to a financial intermediary based on assets owned by the financial intermediary."
Investigators also sought to discover if any payments were made in exchange for the intermediary's actions, whether they came from the ETF or the adviser, and if so, what kind of agreements were involved. The regulator, according to sources, wants line-by-line information for each ETF and intermediary's revenue-sharing payments.
The SEC did not reply when asked to comment.
According to one '40 Act lawyer who spoke to the Times, "this appears to me to be a sales practice concern" involving intermediaries. They had expected a regulatory focus on ETF revenue sharing, as well as the possibility for conflicts when intermediaries recommend one ETF over another or an ETF over a mutual fund.
“It all comes down to the same thing — if there’s a conflict, [SEC officials] expect you to disclose it,” the attorney said.
Broker-dealers and ETF managers both declare such affiliations, according to a study of filings. They went on to say that "nobody knows how granular those disclosures are."
In a disclosure most recently updated in March, Morgan Stanley Wealth Management stated it planned to levy revenue-sharing fees to sponsors of actively managed ETFs but not passive ones.
Active ETFs pay according to a tier system with fees ranging from 0.10% to 10% of total customer assets. With the fund's management charge, the revenue-sharing rate rises.
“Since Morgan Stanley intends to receive revenue-sharing fees from actively managed ETFs, but not passively managed ETFs, we also have a conflict of interest to promote and recommend actively managed ETFs as opposed to passively managed ETFs,” the disclosure said.
Morgan Stanley also stated that their ETF revenue-sharing arrangement gave its advisers an incentive to promote and suggest funds whose sponsors were already paying.
ETF providers can pay up to $300,000 per year to sponsor Morgan Stanley financial advisers' meetings and conferences, in addition to the asset-based revenue-sharing fee for active strategies. ETF managers can also pay up to $700,000 per year for product sales data analytics.
Morgan Stanley declined a request for comment from the Times.
