FYI: So far, we don’t know much about the outcome of the SEC’s Share Class Selection Disclosure (SCSD) Initiative, which allowed advisers to voluntarily self-report if they failed to make required disclosures relating to the selection of mutual fund share classes that paid the adviser or its affiliates 12b-1 fees when a lower-cost share class for the same fund was available to the adviser’s clients. For example, we don’t know how many firms self-reported by the June 12, 2018 deadline, or how many funds, clients or fees were involved in self-reported cases.
However, in a speech this week, Co-Director of the Division of Enforcement Stephanie Avakian provided some interesting information about the Initiative and the background that led up to it, such as:
• Based on Enforcement’s investigative work, the SEC has brought since 2013 more than 15 cases involving disclosure issues surrounding advisers’ decisions to invest their clients in higher-cost share classes when a lower-cost share class for the exact same fund was available. (It would appear that this is a reference only to cases brought outside of the Initiative.)
• OCIE has continued to look at marketing and distribution fees as a perennial priority during adviser exams. Based on its findings, OCIE issued a 2016 Risk Alert highlighting the risks surrounding 12b-1 fees.
• Share class enforcement cases have taken the SEC, on average, 22-½ months to complete.
• Just before launching the Initiative, Enforcement had close to a dozen ongoing investigations relating to share class selection and disclosure.
Against this backdrop and in light of persistent violations, the SEC launched the Initiative. According to Avakian’s speech, the SEC received “a substantial number” of self-reports under the Initiative and believes the Initiative will ultimately be “a success story” for many investors, meaning investors will have their money returned on a much broader scale, and much more quickly, than if the Commission had continued to pursue their investigations in the traditional way.
We will have to see if future enforcement cases — brought against Initiative participants or otherwise — allows us to glean any further information about the outcome of the Initiative.
Full Avakian speech: https://www.sec.gov/news/speech/speech-avakian-092018#_ednref31
Explanation of the SCSD Initiative itself: https://www.sec.gov/enforce/announcement/scsd-initiative
2016 OCIE Risk Alert on Share Class Initiative: https://www.sec.gov/ocie/announcement/ocie-risk-alert-2016-share-class-initiative.pdf
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