SEC Enforcement Division Launches Share Class Selection Disclosure Initiative
The SEC Division of Enforcement launched an initiative designed to incentivize the self-reporting of certain mutual fund share class selection issues and allow advisory clients to obtain repayment of overcharges. Through the "Share Class Selection Disclosure Initiative" ("SCSDI"), the Division will not recommend financial penalties if an investment adviser self-reports a failure to disclose conflicts of interest associated with fees received by the adviser or associated entities pursuant to Investment Company Act Rule 12b-1 when a lower-cost share class of the same mutual fund is available. Advisers are required to inform investors of any conflicts of interest in connection with the receipt of such fees.
The Division explained that it will recommend "standard, favorable settlement terms" for self-reporting advisers. Such settlements will involve the disgorgement of ill-gotten gains and the return of charges to harmed investors, but not an additional monetary penalty. The Division noted that entities who engaged in misconduct related to conflicts of interest for 12b-1 fees and failed to self-report can expect stronger sanctions. The Division further outlined detailed responsibilities for self-reporting entities.
The Division cautioned that eligible advisers that take advantage of the SCSDI may be required to undertake further remedial actions, including notifying clients of any settlement, updating policies and procedures, and evaluating whether other clients should be moved to a lower-cost share class.
Commentary
This new disclosure initiative continues the SEC's focus on conflicts of interest associated with mutual fund share class selection. Investment advisers that receive 12b-1 fees and who may have issues with their mutual fund share class selections will want to carefully review their disclosure practices and past share class selections to evaluate whether it makes sense to participate in the self-reporting initiative. Self-reporting under the initiative would allow investment advisers to avoid civil money penalties, which have ranged from $25,000 to over $1.1 million in recent enforcement actions related to share class selection. Investment advisers have until June 12, 2018 to notify the SEC of their intent to self-report potential violations to take advantage of the standardized settlement terms.