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Portfolio > Mutual Funds

In 12b-1 Fee Crackdown, SEC Urges Advisors to Police Themselves

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The Securities and Exchange Commission said Monday that its enforcement division has launched an initiative designed to protect investment advisors from financial penalties if they self-report certain mutual fund share-class violations and return the money to harmed investors.

The Share Class Selection Disclosure Initiative (SCSD Initiative), “reflects our effort to allocate our resources in a way that effectively targets the continued failure by some advisors 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. 

The securities regulator notes that it has has filed “numerous actions” in which an advisor failed to make required disclosures relating to its selection of mutual fund share classes that paid the advisor a 12b-1 fee when a lower-cost share class for the same fund was available to clients.

The Share Class Selection Disclosure Initiative, the agency said, is intended “to identify and promptly remedy potential widespread violations of this nature.”

Steven Peikin, also co-director, added, however, that the Commission “will continue to pursue securities violations associated with mutual fund share class selection disclosure failures,” and encouraged advisors to “take advantage of the favorable terms we are offering; these terms will not be available to advisors who do not self-report under this initiative, and we will continue to proactively seek to identify and pursue investment advisors that fail to make the necessary disclosures.”

The division states that it will recommend “standardized, favorable settlement terms to advisors that self-report that they failed to disclose conflicts of interest associated with the receipt of 12b-1 fees by the advisor, 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.” 

For advisors that are eligible to participate in the SCSD Initiative, the Division states that it will recommend settlements that will require the advisor to disgorge its ill-gotten gains and pay those amounts to harmed clients, but not impose a civil monetary penalty.

However, the SEC warned that it will “recommend stronger sanctions in any future actions against investment advisors that engaged in the misconduct, but failed to take advantage of this initiative.”

— Check out Risks Lurk in DOL Rule Exemption for ‘Clean Shares’ on ThinkAdvisor.


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