Trustcore Financial Services, LLC

Key dates

2014-01-01

Start of the relevant conduct period during which Trustcore selected and held mutual fund share classes paying 12b-1 fees where lower-cost alternatives were available

2018-03-28

End of the relevant conduct period examined in the SEC’s administrative proceeding

2019-03-11

Date of the SEC’s administrative order against Trustcore Financial Services, LLC under the Investment Advisers Act of 1940

2020-12-31

Closure date of Trustcore’s affiliated broker-dealer, TrustCore Investments, LLC, referenced as subsequent context

Suggested considerations

• Firms should consider reviewing mutual fund share class selection methodologies to confirm that, where multiple classes of the same fund are available, the process appropriately prioritizes lower-cost share classes for clients unless a documented, client-specific rationale justifies a different choice.
• Compliance teams may wish to assess whether existing Form ADV, advisory agreements, and other client-facing disclosure documents clearly describe 12b-1 fees, revenue-sharing, and other distribution or affiliate compensation, including how these payments arise from share class selection and the resulting conflicts of interest.
• Advisory firms should consider mapping and documenting all compensation flows between the adviser, affiliated broker-dealers, and associated persons that are tied to mutual fund holdings, including 12b-1 fees and other distribution-related payments, to support clear conflict identification and disclosure.
• Firms may wish to evaluate supervisory controls and surveillance around mutual fund share class usage, including periodic reviews or exception reports designed to detect legacy, higher-cost, or revenue-generating share classes that remain in client accounts where lower-cost alternatives exist.
• Compliance teams should consider testing whether advisory personnel understand the firm’s fiduciary obligations under the Advisers Act in the context of fee-driven product selection, and whether training materials adequately cover share class conflicts and disclosure expectations.
• Advisory firms may wish to implement or enhance procedures requiring documentation of the rationale for any recommendation or retention of mutual fund share classes that pay 12b-1 fees or other distribution fees, especially where cheaper classes of the same fund are available to the client.
• Firms should consider reviewing and, where needed, updating policies governing interactions between advisory and brokerage affiliates, to ensure that incentives tied to fund distribution or 12b-1 fees do not undermine client best interest or the adviser’s fiduciary duty.
• Compliance teams may wish to benchmark their practices against prior SEC share class selection initiatives and enforcement matters, using this order as an example of the types of conflicts, disclosure gaps, and remedial undertakings the SEC is prepared to pursue.

What changed

This publication does not introduce new rules but memorializes a final SEC enforcement action and related undertakings under the Investment Advisers Act of 1940. The SEC imposed a formal cease-and-desist order against Trustcore Financial Services, LLC for violations of Section 206(2) (fraudulent conduct by an investment adviser) and Section 207 (untrue statements or omissions of material fact in filings with the SEC), in connection with the adviser’s selection and retention of mutual fund share classes that paid 12b-1 fees where lower-cost share classes were available. The order includes a censure of the adviser and requires payment of $378,837.52 in disgorgement and $43,423.76 in prejudgment interest, totaling $422,261.28. The SEC also required remedial undertakings focused on mutual fund

Who is affected

• US-registered investment advisers under the Investment Advisers Act of 1940
• Dual registrants that are both SEC-registered investment advisers and broker-dealers
• Registered investment advisers with affiliated broker-dealers receiving 12b-1 or other fund distribution fees
• Wealth management firms using mutual funds in retail advisory accounts
• Broker-dealers involved in mutual fund share-class selection or receiving 12b-1 revenue via related entities
• Advisory firms with revenue-sharing, distribution-fee or 12b-1 arrangements tied to mutual funds

Related regulations

• Investment Advisers Act of 1940 Section 206(2)
• Investment Advisers Act of 1940 Section 207
• Form ADV Part 2 disclosure obligations (Investment Advisers Act of 1940)
• Rule 206(4)-7 under the Investment Advisers Act of 1940 (Compliance Programs Rule)
• FINRA rules on conflicts and compensation for broker-dealers receiving mutual fund distribution fees