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Investment Advisers to Return over $125 Million to Investors as Part of SEC Settlement

Kyle.DeYoung@cwt.com's picture
Commentary by Kyle DeYoung

In connection with the Share Class Selection Disclosure Initiative ("SCSDI"), the SEC settled charges against 79 investment advisers, who will collectively return over $125 million to clients. The majority of the funds will go to retail investors.

The SEC Orders found that the investment advisers placed clients in higher-cost mutual fund share classes that charged ICA Rule 12b-1 fees ("12b-1 fees") when a lower-cost share class was available without adequately disclosing that the higher-cost class was being selected. According to the Orders, the 12b-1 fees were paid to the investment advisers, in their capacity as brokers, to their broker-dealer affiliates or to their personnel, which created a conflict of interest with their clients (i.e., the investment advisers benefiting from the clients' paying higher fees).

According to the SEC, the settling investment advisers violated Section 206(2) and Section 207 of the Investment Advisers Act by:

  • neglecting to include sufficient disclosure with respect to the receipt of 12b-1 fees; and/or
  • failing to sufficiently disclose "compensation received for investing clients in a fund's 12b-1 fee paying share class when a lower-share class was available for the same fund."

Additionally, as part of the settlement, the firms agreed to a censure and to disgorge the improperly disclosed fees. The SEC said that each adviser also agreed to review and correct all disclosure documents as they relate to mutual fund share class section and 12b-1 fees and to assess whether existing clients should be moved to a lower-cost share class. The SEC did not impose civil money penalties against the investment advisers, consistent with the terms of the SCSDI.

Commentary

Consistent with its word, the SEC required the return of excess fees, but did not impose a penalty of advisers who turned themselves in. The SEC should show more flexibility and exercise similar restraint in imposing penalties, as a general matter, when firms self-report improper conduct. That would encourage firms to self-report and allow the SEC to better communicate to the market the behavior that it considers improper.

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