FYI: We learned more today about the SEC’s intended handling of advisory firms both inside and outside the ambit of its 2018 Share Class Selection Disclosure Initiative.
Today the SEC announced settlements with an additional 16 advisers that self-reported under the Initiative, who together were ordered to pay disgorgement and prejudgment interest totaling nearly $10 million. These 16 advisers were in addition to the 79 self-reporting advisers who settled earlier this year under the Initiative for an aggregate of over $125 million in disgorgement and prejudgment interest. So far, none of the firms that have self-reported have been ordered to pay a civil monetary penalty on top of disgorgement and prejudgment interest, consistent with what the Division of Enforcement indicated in 2018 would be recommended as part of the standardized settlement terms under the Initiative.
Importantly, however, the SEC also settled today with a different adviser for similar violations. In that case, the SEC went out of its way to indicate that this 17th adviser was eligible to self-report as part of the Initiative but did not. Similar to the firms that self-reported, the SEC found that this adviser, whose affiliate received 12b-1 fees, failed to fully disclose the conflicts arising from its selection of more expensive mutual fund share classes for clients when lower-cost share classes for the same fund were available. The adviser was ordered to pay over $1 million in disgorgement and prejudgment interest. On top of that – and unlike the firms that self-reported as part of the Initiative — the adviser was also ordered to pay a $300,000 civil monetary penalty.
SEC Press Release announcing these latest settlements: https://www.sec.gov/news/press-release/2019-200.
It should also be noted that, separately from the announced Initiative settlements, the SEC has been bringing enforcement actions against advisers for other share class selection disclosure violations that, at least on the surface, appear not to fit within the scope of the Initiative. For example, a settled enforcement action was announced this week against two BMO-related advisers that allegedly failed to disclose conflicts in the selection of higher-cost fund share classes, including under an arrangement that resulted in one of the advisers receiving revenue sharing that it would not have received if clients had been invested in lower-cost classes that were also available. By selecting the higher-cost share class, the adviser allegedly also benefitted by avoiding paying transaction costs to its clearing broker that it otherwise would have paid on lower-cost share classes.
Since the Initiative only covered inadequate disclosures of conflicts posed by 12b-1 fees that the adviser or its affiliate received when selecting a higher-cost share class, and not conflicts posed by the receipt of revenue sharing or other benefits, the BMO-related case appears to fall outside the Initiative. No surprise, then, that in addition to the $25 million in disgorgement and $4.7 million+ in prejudgment interest they were ordered to pay, the BMO-related advisers were also ordered to pay a civil monetary penalty totaling $8.25 million. Interestingly, the findings also included allegations that the BMO-related advisers breached their duty to seek best execution, whereas the Initiative settlements – consistent with the standardized terms originally announced – do not include best execution allegations.
BMO-related advisers settlement order: https://www.sec.gov/litigation/admin/2019/34-87145.pdf.
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