The Securities and Exchange Commission and journalists have something in common. Both are leery of wiggle words like "may."
Editors always prefer that reporters file stories that offer certainty for readers. If they write that something "may" happen or "could" result in dire consequences, editors sometimes tell them to find something more concrete with which to lead the story.
The SEC's problem with "may" revolves around
disclosures of conflicts of interest. If the conflict is there, investment advisers better say so, rather than describing the potential conflict as something that "may" affect their recommendations to clients.
A case pending in the U.S. Court of Appeals for the D.C. Circuit focuses on this situation. The Robare Group, a registered investment adviser, has appealed an SEC administrative decision to sanction the firm for failing to disclose conflicts connected to a revenue sharing arrangement it had with Fidelity Investments for the sale of certain mutual funds.
The firm entered the agreement with Fidelity in 2004 and between September 2005 and September 2013, the firm was paid approximately $400,000. The SEC alleges the firm did not disclose the arrangement at all until 2011.
In 2011, the firm changed its disclosure to say its investment adviser representatives may receive selling compensation in the form of 12b-1 fees. That still wasn't good enough for the SEC.
"Regardless of whether the source of the payments were 12b-1 fees, TRG's disclosure that it
may [emphasis is SEC's] receive selling compensation in the form of 12b-1 fees in no way revealed that TRG actually had an arrangement with Fidelity, that it received fees pursuant to the arrangement, and the arrangement presented at least a potential conflict of interest," the SEC
stated in a 2016 administrative opinion.
The D.C. Circuit heard an oral argument in the case in January. A decision is pending.
The court ruling will come as
the SEC is cracking down on investment advisers who fail to disclose 12b-1 fees. The SEC just
completed an initiative in which it encouraged firms to self-report in instances where they put their clients into expensive share classes when lower-priced classes were available in the same fund.
The problem mostly centers on investment advisory firms that are paying the additional compensation from funds to personnel also registered as brokers.
The SEC's focus on fees and expenses means advisers should be more specific on what they reveal to clients, according to Fred Reish, a partner at Drinker Biddle & Reath.
"I would tighten up the screws on your disclosures on anything that would cause you to make more money," Mr. Reish said in a recent firm webcast. He added in an interview: "The SEC is saying 'may' is not good enough. It can't be a 'maybe we will, maybe we won't.'"
The court might back up the SEC on that point.
"[I]t appears many firms used the word 'may' in good faith, believing the term was consistent with industry practice and regulatory guidance," the law firm Eversheds & Sutherland
said in a legal alert on the Robare case. "Regardless of how the Circuit Court decides this case, its decision will likely affect how firms draft disclosure documents in the future."
In the coming months, we may see "may" changed to "will" on many Form ADVs.
