FYI: Today, the SEC issued settled enforcement orders against 79 IAs that collectively will return $125 million to investors under the Division of Enforcement’s 2018 Share Class Selection Disclosure Initiative. The initiative aimed to incentivize IAs to self-report violations resulting from undisclosed conflicts of interest in the selection or recommendation of mutual fund share classes that paid the IAs, their BD affiliates and/or their reps a 12b-1 fee, when less expensive share classes were available. According to the SEC’s announcement, participation in the initiative allowed IAs to avoid financial penalties if they timely self-reported undisclosed conflicts of interest, agreed to compensate harmed clients, and undertook to review and correct their relevant disclosure documents.
While I have not read all 79 orders, several common features appear in the ones I have read:
–All cite 12b-1 fees as the inadequately disclosed fees that caused the violations at issue. (That is consistent with the initiative when announced, which seemed to focus on 12b-1 fees and not any other type of fee that might cause expense differentials among mutual fund share classes and related conflicts.)
–All recite in a conclusory fashion that the IA did not “disclose adequately” the attendant conflicts without detailing exactly what the disclosure said (or didn’t say) that made the disclosure inadequate.
–All allege violations of Advisers Act Section 206(2), an anti-fraud provision which does not require scienter to establish a violation, and Section 207, which generally prohibits filing untrue reports with the SEC (i.e., a false or misleading Form ADV).
–All include multiple sanctions, including cease and desist orders, censures, and orders to pay disgorgement and prejudgment interest to affected investors.
–All require the IA to undertake several corrective measures, including amending disclosures, moving clients that should be in lower-cost classes, reviewing/updating compliance procedures as necessary to prevent similar violations and notifying affected investors of the SEC’s order.
–All of the IAs acknowledge in the order that the SEC is not imposing a civil penalty based upon IA’s self-reporting under the initiative, but that the Division may petition to reopen the proceeding and seek a civil penalty in the future, if information is obtained indicating that the IA knowingly provided materially false or misleading information or materials to the SEC, in this or a related proceeding.
The SEC’s announcement leaves the door open that additional settlement orders may be issued under the initiative in the future, by indicating that staff are continuing to evaluate self-reports that were received from IAs prior to the initiative cut-off date.
The SEC’s announcement of these settled cases, including links to the list of IAs that settled and their individual orders, can be accessed here: https://www.sec.gov/news/press-release/2019-28.
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