FYI: Two more advisers settled charges with the SEC over investing client assets in mutual fund share classes that paid 12b-1 fees to the firms’ IARs, when less expensive classes were available. According to the SEC orders, one adviser incorrectly disclosed to clients that its IARs either did not receive 12b-1 fees or only selected the more expensive share classes when less expensive share classes of the same fund were unavailable. The other adviser incorrectly stated that it selected higher-cost share classes for the “long-term benefit” of clients and only where less expensive share classes of the same fund were unavailable.
Charges were based on failures to disclose conflicts of interest, violating the duty to seek best execution and failing to implement adequate compliance policies and procedures relating to share class selection practices. Sanctions included censures, cease and desist orders, disgorgement and civil monetary penalties.
Interestingly, the SEC press release announcing these cases specifically noted that these advisers were NOT ELIGIBLE to self-report pursuant to the Share Class Selection Disclosure Initiative announced in February 2018 because the SEC had contacted these advisers about the disclosure violations before the initiative was announced. As such, we still don’t know how the SEC will approach enforcement against advisers that did self-report, or against those that were eligible and did not report. However, it is apparent from these cases that charges brought outside the initiative will still include best execution violations where warranted, as well as disclosure and compliance failures.
First case (American Portfolios Advisors): https://www.sec.gov/litigation/admin/2018/ia-5083.pdf.
Second case (PPS Advisors and Passaretti): https://www.sec.gov/litigation/admin/2018/ia-5084.pdf. (Note that in this case, the individual who was the adviser’s co-founder, majority owner, Chief Executive Officer, Chief Investment Officer and an IAR receiving a significant portion of the 12b-1 fees paid, was also charged with “causing” the adviser’s violations.)
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