Tuesday, February 13,
2018 07.43AM / News
The Division of Enforcement of the
Securities and Exchange Commission today announced a self-reporting initiative
that seeks to protect advisory clients from undisclosed conflicts of interest
and return money to investors.
Under the Share Class Selection
Disclosure Initiative (SCSD Initiative), the Division will agree not to
recommend financial penalties against investment advisers who self-report
violations of the federal securities laws relating to certain mutual fund share
class selection issues and promptly return money to harmed clients.
Section 206 of the Investment Advisers
Act of 1940 imposes a fiduciary duty on investment advisers to act in their
clients' best interests, including an affirmative duty to disclose all
conflicts of interest. A conflict of interest arises when an adviser
receives compensation (either directly or indirectly through an affiliated
broker-dealer) for selecting a more expensive mutual fund share class for a
client when a less expensive share class for the same fund is available and
appropriate. That conflict of interest must be disclosed.
The Commission has long been focused
on the conflicts of interest associated with mutual fund share class
selection. Differing share classes facilitate many functions and
relationships. However, investment advisers must be mindful of their duties
when recommending and selecting share classes for their clients and disclose
their conflicts of interest related thereto. In the past several years,
the Commission has charged nine firms with failing to disclose these conflicts
of interest. These actions included significant penalties against the
investment advisers, and collectively returned millions of dollars to
clients. In addition, the Commission's Office of Compliance Inspections
and Examinations has repeatedly cautioned
investment advisers and other market participants to examine their
share class selection policies and procedures and disclosure practices.
"This focused initiative reflects
our effort to allocate our resources in a way that effectively targets the
continued failure by some advisers to disclose conflicts of interest around
share class selection and, importantly, is intended to facilitate the prompt
return of money to victimized investors," said Stephanie Avakian,
Co-Director of the Division of Enforcement.
"The legal and regulatory
requirements in this area are clear, and the Commission will continue to pursue
securities violations associated with mutual fund share class selection
disclosure failures. We strongly encourage advisers to take advantage of
the favorable terms we are offering; these terms will not be available to
advisers who do not self-report under this initiative, and we will continue to
proactively seek to identify and pursue investment advisers that fail to make
the necessary disclosures," said Steven Peikin, Co-Director of the
Division of Enforcement.
Under the SCSD Initiative, the
Enforcement 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 the advisory clients. Among other things, for eligible
advisers that participate in the SCSD Initiative, the Division will recommend
settlements that will require the adviser to disgorge its ill-gotten gains and
pay those amounts to harmed clients, but not impose a civil monetary penalty.
The Division warns 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 this initiative.
"Proper disclosure of conflicts
of interest is of utmost importance, and a necessity for any investment adviser
to ensure that it is satisfying its obligations as a fiduciary to its
clients," said C. Dabney O'Riordan, Co-Chief of the Asset Management
Unit in the Division of Enforcement. "This initiative is designed to
promote compliance with these obligations with respect to mutual fund share
class selection, while at the same time quickly returning money to harmed
clients."
Eligibility for the SCSD Initiative is
explained in a detailed
announcement by the Enforcement Division. Investment advisers
must notify the Division of Enforcement of their intent to self-report no later
than June 12, 2018, by email to SCSDInitiative@sec.gov or by mail to SCSD Initiative,
U.S. Securities and Exchange Commission, Denver Regional Office, 1961 Stout
Street, Suite 1700, Denver, Colorado 80294.
The SCSD Initiative is being led by
the Asset Management Unit.
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