Welcome, thank you all for joining our webinar today hosted by MyComplianceOffice and Cipperman Compliance Services. With that I'll hand it over to Todd, thank you.

Let's start the webinar with revenue sharing, this idea of essentially product sponsors paying distributors to help distribute their products or solutions. There are really sort of two sides to revenue sharing. One is that liability for those advisors that receive payments. When I say advisors in this context these are what I'll call advisor distributors, those that are sort of in the business of collecting assets although they're [inaudible 00:04:37] regulatory advisors, but really they're using various forms of third party products. Although they're advisors in the regulatory sense they're really distributors in terms of as I call it the financial services food chain. Then the second piece of that is those that pay, because there's sort of potential liability for those that receive revenue sharing, but also potential liability for those that pay revenue sharing.

There's been a bunch of recent cases, and also cases that go back really, I've been practicing since the early 90s that go back that far, around people that receive payments for revenue sharing in an unauthorized way. Sort of one of the classic schemes is a recent one that was address in the Voya Financial case which was only a couple of months ago. Just a note on case names I use case names for ease of reference not as a way of sort of publicly shaming these companies. Voya Financial being a great example, a fantastic company, a great compliance firm, a great compliance group, but this particular case involved one part of their business. I would say with all the cases I name they're there for point of reference. Basically they were accused by the SEC of receiving, they were a fronted advisor, they were using various third party mutual funds, and Voya was taking trailer fees from the underlying mutual funds. It was sort of straight up a portion of the 12B1 fees that the mutual fund paid, and these were being paid essentially to the custodian/broker that held the client assets. The assets would go to the custodian broker, the fund companies would pay 12B1 fees, and the custodian broker shared a portion of those 12B1 fees with Voya.

In addition to those straight up 12B1 sharing Voya actually paid ongoing shareholder servicing fees to Voya on the theory that they were doing shareholder services that the clearing broker wouldn't be doing, so it's almost a classic avoided TA, they call that, and Voya was getting paid. Now what's interesting is Voya did disclose that they could receive revenue sharing, that wasn't really the issue. The issue tat the SEC raised was that Voya needed to disclose a deeper piece which is they had an inherent conflict of interest to move access to the funds that paid a 12B1 fee, that seems somewhat technical. Would that really have made a difference for the end client? They knew Voya was receiving 12B1 fees would they not have worked with Voya had they known that certain funds paid them, and certain funds may not have, and therefor there's inherent conflict of interest. I think this is the first time they really raised this issue that I raise upfront, which is would any amount of disclosure really been sufficient, or is the SEC really saying we don't like revenue sharing, particularly in these kind of wrap, or pseudo wrap programs where they're using third party funds, they're paying back trailers?

One thing that was really unique about Voya that was in the case was Voya as part of the settlement did not agree to get rid of revenue sharing, but they said they would no longer take revenue sharing on a fund by fund basis. Instead the clearing firm would actually pay them based on total assets invested to the program, so therefor there was no per product conflict of interest. As far as I know that's the first time the SEC sort of signed off on that. Their prior statements were more about revenue sharing being almost inherently wrong, and there's not enough disclosure, but apparently they were okay with this. I would also like to make an editorial point on the Voya case, which is interestingly enough the SEC never alleged that there was any harm to investors, or clients. They never actually suggested even that Voya made investment decisions based on the revenue sharing. Their concern was simply that there was an inherent conflict of interest, and they didn't fully disclose that conflict of interest. It brings a really interesting point about compliance, and the enforcement world, which is very often the SEC doesn't really need to allege any kind of harm to clients. They can simply allege that as a fiduciary there was an undisclosed conflict of interest, and that alone leads to the action. Okay. That was the Voya case.

There's been some other cases recently that sort of play on that theme, and there's the [inaudible 00:09:09] case, which in that case, and this wasn't really necessarily alleged in Voya but in [inaudible 00:09:14] the allegation was certain funds paid revenue sharing, and certain funds didn't, [inaudible 00:09:20] is in the same position as Voya, they manage client assets, they use third party funds. They received on all note NTF funds, or transaction fee funds. In the program they receive a 12 basis point trailer, and again they were charged with failing to disclose that this sort of inherent conflict of interest that they had a conflict of interest to move money into those particular funds. Again, I raise the issue here that there was no allegation necessarily that anything was harmed, or that [inaudible 00:09:53] even made investment decisions related to that revenue sharing, but never the less they were charged with a breach of fiduciary duty. I again raise the question would disclosure have mattered?

You should take a look at the total wealth management case, another case I think from about a year ago. Very similar set of facts and they did disclose that they, "May receive revenue sharing." The SEC got really accusing, they said, "No, the language should not say you may receive revenue sharing you actually do receive revenue sharing." This sort of hedging language that you may receive it wasn't sufficient disclosure. If you receive it you should disclose it, and then disclosure should be very specific. In fact they had a lot of disclosure, but the SEC criticized them for having disclosure, because they put it buried on page 60 of the private place memorandum. It was sort of the total wealth management [inaudible 00:10:41], which made me say well maybe revenue sharing in this sort of fund selection context is completely prohibited. But then you get to the Voya case, which suggest well maybe if it's not based on a fund by fund basis you can receive it. It's very interesting. I don't know the final answer to that.

You have these cases where receiving payments on funds, on the revenue sharing side creates this potential conflict of interest, which may or may not be disclosed away, but certainly you need a significant disclosure amount. But there are other cases, which are a little bit different. Dion Management essentially it was a double dipping case. They were a front end advisor, and they were actually receiving ... They'd actually disclosed that they were receiving revenue sharing potentially from fund companies, and their broker custodian. What they didn't disclose is on a lot of assets they were receiving the same number of basis points from both. They didn't disclose that they could actually get, they did disclose they could receive, they didn't disclose they could receive it twice on the same set of assets. By the way in my days of doing this there's nothing the SEC hates more than double dipping, essentially getting paid twice for the same set of services from different sources. They might be able to swallow the sort of avoided TA, you get paid on shareholder services, but if you're getting paid twice for essentially the same set of services it's going to be very hard for you to justify those fees.

Another sort of streak of this is sort of what I'll call implied revenue sharing. There's been a couple cases Washington Wealth Management and Advantage they were companion cases, and essentially, this is a very common practice forgivable loans, so if you are actually with a broker/dealer very often, a registered rep if they take a loan to work for that broker/dealer, which might be forgivable, so you have enough production. In the SEC's view those "forgivable loans" are a form of revenue sharing from the broker to the rep, and those kind of forgivable loans should be disclosed in the form ADV. Sort of something you might not think of as a classic revenue sharing, there's no hard dollars flowing back, but the SEC saw the conflict of interest, why would you use that broker if not for these forgivable loans. We talked about the [inaudible 00:13:09] case where they were alleged, they had incentive to put money in NTF funds where they received 12 basis points of trailers if ... A little bit of a twist on this was the Valentine case.

Their charge was that they used to receive revenue sharing for third party funds from the custodian, but probably because one of these cases the custodian cut off the revenue sharing, so we're not going to do it anymore, and instead they moved most of their assets to proprietary funds, in Valentine's proprietary funds. You had a double dipping element to that, and they tried to make up an excuse with the SEC that the custodian had some sort of regulatory problem, and that was not really the case. The issue was they just weren't getting paid anymore. For those of you who've been around awhile this also has echoes of the early 2000s shelf space cases where both fund companies, and advisors, as well as the broker, dealer platforms, the seminal case here was Morgan Stanley where they were essentially the fund companies were paying revenue sharing, revenue sharing to the broker dealer, and both sides were charged in the Morgan Stanley case they were charged for not fully disclosing the shelf space arrangements. Essentially the [inaudible 00:14:27] they were receiving. Similarly the fund companies were charged with not properly disclosing all the various shelf space, and there's been several cases where they add disclosure to the registration statements for the funds. As I said in some ways these cases are new, in some ways it's back to the future. For those who've been doing this a long time disclosure becomes very important.

Those are a couple of the revenue sharing cases on the receiving side. This idea of receiving trailers, asymmetrical payments, some funds paid more than others, double dipping, we talk about this idea of sort of implied revenue sharing, sort of these, I use the forgivable broker/dealer loans. You got to sort of watch how people benefit, and whether or not investment decisions are effected. Certainly if they're effected you got to breach your fiduciary duty, but even if they're not the SEC may suggest that you have an issue. We're going to move to the next slide, and sort of take the reverse of it, and say, okay what about advisors paying revenue sharing. Essentially product sponsors paying various forms of revenue sharing.