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.
Continue reading “SEC’s Enforcement Division announces self-reporting initiative for investment advisers”