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What We’re Reading This Week


The Journal reported last week that more than 50 investment advisors are being pressured by the SEC to settle claims that they overcharged clients in certain mutual funds.

The regulator alleges that over the past several years, investment advisors and their brokerages steered clients into expense share classes of mutual funds when lower cost versions of the same fund were available. The additional expenses come in the form of what’s called 12b-1 fees. These fees are charged inside of mutual funds against client assets and are sometimes redirected to the firm, or individual, that sold the fund. This can create a conflict of interest for advisors, specifically in “managed” accounts where the client does not have a say in how their funds are invested. Many institutions utilize funds that charge 12b-1 fees, but in recent years it has become standard practice to credit client accounts with the fee as a way to mitigate conflicts.

In 2017 a dozen firms, including SunTrust and PNC, settled similar claims with the SEC to the tune of $16 million. Typically, in such settlements, the offending firm does not deny or admit wrongdoing but agrees to pay a fine in order to avoid an investigation or additional legal costs. Interestingly, such penalties do not get returned to investors.

For the most part, people understand that they are paying for financial advice. However, financial advisors often receive compensation that is not clearly disclosed to clients. Additional enforcement actions by the SEC are coming on the heels of the Department of Labor’s failed Fiduciary Rule, which was struck down in court last year. Jay Clayton, the SEC Chairman is taking up the helm:

“A commission-based compensation scheme is fine, if properly disclosed and if the broker-dealer is not putting their interests ahead of the clients’. You can have a commission-based model, but you can’t have high-pressure, product-based sales contests, where it’s just not possible to say with any credibility that you’re not putting your interests ahead of those of your clients. In that case, mitigation [of the conflict of interest] is not practical.”

While firms have put steps in place to avoid potential conflicts (or potential fines?) others would rather continue to obfuscate their compensation. In order to accomplish this, many brokerage firms have stopped paying their advisors the additional revenue but still continue to collect it at the firm, while limiting advisor choices to more lucrative products

“The adviser generally limits its selection to JPMorgan affiliated funds,” says a filing from an investment-management unit of JPMorgan Chase & Co. “With limited exceptions, the adviser does not consider or canvass the universe of unaffiliated funds available, even though there may be unaffiliated funds that may be more appropriate for the client accounts or…have superior historical returns.”


As you know, lots of interesting things happen in the world that I do not write about, even though this blog is called “What We’re Reading” and I read lots of things. I try to limit my posts, not only to what I’m reading but also to things I find interesting to the extent that they relate to finance or economics.

Thus, I have held my tongue on the current upheaval in Venezuela. In case you were unaware, the country has been in serious decline over the past few years because of hyperinflation, food shortages and infrastructure failings. So far, 3 million Venezuelans have left the country. On January 23rd, Juan Guaidó, declared himself the acting president over Nicolás Maduro. Naturally, Maduro was not impressed!

How and why this happened is more pollical than I like to get here but since the announcement, many other countries have voiced support for Guaidó, including the United States and most of Europe.

From a socio-political perspective this is all very fascinating. Even from a financial perspective, there is a lot going on here! That being said, it all comes together at Citgo! You see, Citgo, one of the largest oil refineries, is owned by Venezuelan Petróleos de Venezuela SA, which in turn, is owned by the Venezuelan government, making Citgo a money maker for Maduro. Until recent history this wasn’t really a big deal, but the U.S. has imposed sanctions on Petróleos de Venezuela SA

Following that announcement, Guaidó stated he would like to install new boards at Petróleos and Citgo. As you can imagine this creates “complex legal questions about who controls those businesses.” Indeed, It should be easy for Guaidó to install new leadership at Citgo because the U.S. supports his claim on the presidency. It will be harder though to change anything at Petróleos because its, you know, in Venezuela, where Maduro has more influence and well, an army.


Citgo plans to go along with Juan Guaidó’s proposed board change, which is nothing short of amazing:

A Citgo spokesman said in a statement: “We are aware that there may be new members elected to the Citgo Petroleum Corp. board of directors. In corporate governance, as with all matters, we will follow the laws of the United States.”

Well, when you put it like that it makes a lot of sense. But in truth, its still a little weird. A guy with no prior affiliation to Citgo stated, “I am now the President of Venezuela,” and was able to immediately change the board of a major company in a different country. Despite the fact that the (other?) president of Venezuela said “no” and the Venezuelan company that owns Citgo said “no.” Sure, Guaidó is accepted as the legitimate president of Venezuela in the U.S. but still, this is weird. To me, it appears like the change will be accepted simply because Citgo employees shrugged their shoulders and collectively said “sure.” It’s hard to imagine this happening somewhere else.


Other Stuff:

Venezuela’s Opposition Leader Guaidó to Name New Citgo Board, Rubio Says

Stop Worrying About the Fed’s Balance Sheet

White-Collar Robots Are Coming for Jobs

Bill Gross Retires After Storied Four-Decade Career in Bonds

Bitcoin Dealer Seeks Credit Protection; Dead Owner Had Sole Access To $250M

Bankers Can’t Feel Great Helping Slack Go Public

Message Platform Slack Moves Ahead Amid Direct Listing Plans


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