SEC’s Enforcement Division announces self-reporting initiative for investment advisers

On February 12, 2018, the US Securities and Exchange Commission’s (SEC) Division of Enforcement (the Division) announced1 the Share Class Selection Disclosure (SCSD) Initiative,2 under which the Division will agree not to recommend financial penalties against investment advisers who self-report violations of securities laws relating to certain mutual fund share class selection issues and promptly return money to affected clients.

Specifically, under the terms of the SCSD Initiative, the Division will recommend “standardized, favorable settlement terms to investment advisers that self-report that they failed to disclose conflicts of interest associated with the receipt of 12b-1 fees by the adviser, its affiliates, or its supervised persons for investing advisory clients in a 12b-1 fee paying share class when a lower-cost share class of the same mutual fund was available.”

For eligible participating advisers, the Division will recommend settlements that would require disgorgement and payment of such profits to affected clients, but would not impose a civil monetary penalty.  The settlements would also require advisers to undertake several specific actions, including evaluating, updating (if necessary), and reviewing the implementation effectiveness of compliance policies and procedures regarding mutual fund share class selection within 30 days.

The SEC has expressed “significant concern that many investment advisers have not been complying with their obligation under the Advisers Act to fully disclose all material conflicts of interest related to their mutual fund share class selection practices, and that investor harm involving this lack of disclosure may be widespread.”

In conjunction with the announcement, the Division warned that it “expects to recommend stronger sanctions in any future actions against investment advisers that engaged in the misconduct but failed to take advantage of [the SCSD Initiative].”

The SEC published a questionnaire3 and a related attachment4 alongside the announcement.

Investment advisers must notify the Division of their intent to self-report by June 12, 2018.  Advisers that self-report must, within ten business days from the date of notification to the Division, submit a completed questionnaire providing detailed information, including the amount of 12b-1 fees in excess of the lowest-cost share class.  Providing this information involves aggregating data, performing calculations, and identifying impacted customer accounts, among other things.

As we noted in our recent white paper titled “The rewards and risks of managed account programs in the wealth management industry,” we believe that the regulatory scrutiny in the managed account space will continue to grow.  In the paper, we provide an overview of the areas in which regulatory scrutiny is likely to intensify, including share class selection, use of proprietary funds, fees and billing, and disclosures and reporting.  The paper also provides an overview of actions for firms to consider taking to begin addressing some of these risk areas.

Deloitte has been a leading advisor with respect to assisting our wealth management clients with their fiduciary operations and conflicts of interest management programs.  Our recent experience includes advising some of our largest and most complex clients on areas such as fiduciary investment selection processes, identification of conflicts, conflict mitigation and elimination strategies, disclosures, policies and procedures, and customer impact calculations.

Please contact one of our professionals listed below for more information or with questions about how we may assist with your efforts related to the SCSD initiative.

Contacts

Maria Gattuso
Principal | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

Karl Ehrsam
Principal | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

Bruce Treff
Managing Director | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

Robert Zakem
Managing Director | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

Michael Chung
Managing Director | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

Gaby Huaman
Managing Director | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

Josh Uhl
Senior Manager | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

Craig Friedman
Senior Manager | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

Sean Cunniff
Specialist Leader | Deloitte Risk and Financial Advisory
Deloitte & Touche LLP

Chris Spoth
Managing Director | Deloitte Risk and Financial Advisory
Executive Director, Center for Regulatory Strategy, Americas
Deloitte & Touche LLP

Alex LePore
Senior Consultant | Deloitte Risk and Financial Advisory
Center for Regulatory Strategy, Americas
Deloitte & Touche LLP

1US Securities and Exchange Commission, “SEC Launches Share Class Selection Disclosure Initiative to Encourage Self-Reporting and the Prompt Return of Funds to Investors,” (February 12, 2018), available at https://www.sec.gov/news/press-release/2018-15.
2US Securities and Exchange Commission, “Share Class Selection Disclosure Initiative,” available at https://www.sec.gov/enforce/announcement/scsd-initiative
3US Securities and Exchange Commission, Division of Enforcement, “Share Class Selection Disclosure Initiative Questionnaire for Self-Reporting Advisers,” available at https://www.sec.gov/divisions/enforce/scsd-initiative-questionnaire.pdf.
4Available at https://www.sec.gov/divisions/enforce/scsd-initiative-questionnaire-attachment.pdf.

This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.

As used in this document, “Deloitte” means Deloitte & Touche LLP, a subsidiary of Deloitte LLP. Please see http://www.deloitte.com/us/about for a detailed description of our legal structure. Certain services may not be available to attest clients under the rules and regulations of public accounting.

Copyright © 2018 Deloitte Development LLC. All rights reserved.

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