The Regulatory & Internal Investigations team has assisted more than 70 firms in responding to a variety of share class selection-related issues. These include the SEC’s Share Class Selection Disclosure Initiative, wherein Bates assisted firms in analyzing their mutual fund trading activity, identifying instances in which a share class of the same fund with a lower 12b-1 fee was available to that investor at that time, and quantifying the 12b-1 fee differential for the purposes of repayment.
Similarly, Bates has conducted the same type of expense analysis in relation to conflicts of interest arising from revenue sharing, in which the firm or its advisors were allegedly incentivized to select No Transaction Fee (NTF) share classes due to the presence of additional revenue sharing payments where a lower cost class of the same fund was available to trade on a Transaction Fee (TF) basis. In those investigations the differential in expense ratios between the two share classes is used to estimate harm to the investor, potentially in addition to the revenue sharing amounts disgorged (quantified by Bates).
Bates has also assisted clients in responding to additional issues arising from NTF/TF share class analyses, such as the avoidance of transaction fees which would have been born by the firm or the advisor had an NTF class not been chosen. Dedicated analyses of cash sweep options have also been completed, with investor impact estimated via expense ratio or yield differentials.
In all these matters, Bates carefully reviewed impacted accounts for other explanatory factors and removed from the analysis any accounts or trades which did not represent a conflict. These factors include the nature of the client agreement, assets held below the line, rebates which had already been paid in some fashion, minimum investment waivers which were requested and denied, etc.
As a result of its extensive work in this space, Bates has developed a high degree of familiarity with clearing firm data necessary for such analyses from NFS, Pershing, Schwab, and others. Bates has also developed and maintains proprietary databases of historical mutual fund fee information, which is leveraged in analyzing both lower cost share class availability and in quantifying potential harm.
Bates has also assisted numerous firms in relation to FINRA’s 529 Plan Share Class Initiative, wherein Bates took in the sponsor provided mutual fund activity, and then used beneficiary date of birth to calculate a breakeven point at which a C-share became more expensive than an A-share of the same fund. Bates then quantified the impact to the investor from that point through the end of the holding period, based on the expense ratio differential between the two classes, leveraging our databases of historical mutual fund information. Explanatory factors similar to those mentioned above were also analyzed, in addition to specific analyses around systematic or automatic investment programs. Analyses related to rollovers not made at NAV were also completed.
For all the matters above, and as required, Bates also calculated prejudgment interest, and assisted in compiling the information necessary to make repayment to investors, including via coordination with 3rd party payment processing firms.