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79 Firms Reach Settlement with SEC in Share Class Initiative

The SEC announced settlements with 79 investment advisers who will return more than $125 million to clients, with a substantial majority of the funds going to retail investors.  The advisers did not admit or deny the findings and agreed to certain undertakings, including reviewing and correcting all relevant disclosure documents concerning share class selection and 12b-1 fees and evaluating whether existing clients should be moved to an available lower-cost share class and moving clients, as necessary.  The SEC’s actions stem from a Share Class Selection Disclosure Initiative, which the Division of Enforcement announced in February 2018 to incentivize investment advisers to self-report violations of the Advisers Act resulting from undisclosed conflicts of interest, promptly compensate investors, and review and correct fee disclosures.  The SEC’s orders found that the advisers failed to adequately disclose conflicts of interest related to the sale of higher-cost mutual fund share classes when a lower-cost share class was available.  According to the SEC’s orders, 12b-1 fees were routinely paid to the advisers in their capacity as brokers, to their broker-dealer affiliates, or to their personnel who were also registered representatives, creating a conflict of interest with their clients, as the investment advisers stood to benefit from the clients’ paying higher fees.  The SEC said its staff is continuing to evaluate self-reports that were received from investment advisers prior to the initiative cut-off date.

 
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