Read the Prospectus

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Q: I am a broker-dealer.  My client and I agreed that, whenever her account would contain uninvested funds, I would routinely invest the uncommitted balance in one or more money-market funds.  In the brokerage industry, this practice is referred to as an ‘automatic sweep’.

Now, my client is complaining that I have committed securities fraud by failing to disclose that I receive fees from these money market funds and their advisors.  True, I made no disclosure whatsoever to her regarding these fees.  However, information about them can be found in the funds’ prospectuses, which are publicly filed with the Securities and Exchange Commission.

According to a typical prospectus, under a ‘distribution-services’ agreement, the Fund gives compensation to its advisor at a certain percentage rate of the Fund’s assets – much of which will be passed on to broker-dealers and other financial intermediaries for their ‘distribution assistance’.

A: Under the SEC’s interpretation of its regulation known as Rule 10b-10, the general disclosures made by these prospectuses are sufficient to satisfy your duty under that rule to make adequate disclosures about third party remuneration.  The fund prospectuses and other documents publicly filed with the SEC serve to satisfy your Rule b10b-10 disclosure obligations.

Where an investor knows that her uncommitted balance is automatically swept by her broker-dealer into a specific money market fund, and where the prospectus for that fund reveals that the fund and its advisor pay fees to broker-dealers for their assistance, the investor is expected to piece together the information and conclude that her broker-dealer receives fees from that money market fund.

By: Scott Baron,
Attorney at Law Advertorial

The law responds to changed conditions; exceptions and variations abound. Here, the information is general; always seek out competent counsel. This article shall not be construed as legal advice.

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