Thread by @AdviserCounsel

.@SECGov is still using a tremendous amount of resources to make sure an RIAs' clients are holding the most appropriate share class for clients.

It is low hanging fruit & easy to identify during exams. This isn't just for RIAs affiliated with BDs.

I expect this to continue.🧵

The Request: Provide a list of all client holdings as of August 31, 2021.

SEC Staff: Runs the list through their system and identifies less expensive share classes. Cites RIA for a deficiency for holding more expensive share class when less expensive share class is available.

Of course this isn't the law. The fiduciary standard of skill and care requires an RIA to consider factors besides expense ratio.

There are many reasons why holding a more expensive share class might be more prudent. (Putting aside any arguments in favor of ETFs.) With mutual funds, RIAs should generally consider holding periods, transaction fees, and expense ratios.

I have seen RIAs holding $50,000 in Class A shares, which are 5% or less of their clients' holdings be pressured into reimbursing clients for the expense difference between Class A and I shares.

I have seen larger RIAs make reimbursements as large as $300,000.

The takeaway: RIAs holding, billing on, or recommending mutual funds should be cognizant of these issues. They should have policies and procedures for reviewing their holdings and converting share classes, as necessary.