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Regulation and Compliance > Federal Regulation > SEC

Advisor Share-Class Infractions a ‘Widespread Problem,’ SEC Says

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Investment advisors putting their clients into higher fee share classes when lower cost ones are available “is a widespread problem,” Steven Peikin, co-director of the Securities and Exchange Commission’s Enforcement Division, said Friday.

Speaking on a panel at the SEC Speaks conference in Washington, Peikin, in referencing the division’s newly launched Share Class Selection Disclosure Initiative, said the “ultimate goal” of the program is to try “return money” to as many investors as possible.

He counseled attorneys present to urge investment advisors to “self-report” such infractions, as laid out under the initiative. If not, “we promise that if we find them later, we will punish them more severely,” Peikin said.

Under the initiative, the IM division said 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.”

As for the SEC’s Investment Management Division, it has three near-term priorities, not necessarily in order of how they’ll show up, said Paul Cellupica, the IM Division’s deputy director, on a separate panel at the event.

One project that’s “not a surprise” is that IM is working with the Division of Trading and Markets on recommendations regarding standard of conduct for investment advisors and broker-dealers, aka a fiduciary rule.

The division is also considering recommending that the commission “repropose new rules that would allow ETFs to operate without first obtaining exemptive relief from the commission,” Cellupica said.

The commission proposed ETF rules in 2008 that were never adopted. “This proposal would build on that.” ETFs, he added, “have grown enormously in recent years and these proposed rules, if adopted, would create a more transparent and efficient and fair regulatory framework.”

Also, another rule proposal would provide investors in variable annuities and other variable insurance products “more user-friendly disclosure” through a summary prospectus.

Another item is to seek adoption of Rule 30E3, which would give funds an optional method of delivering shareholder reports by posting them on a website and send investors a written notice of the website address and how to access their shareholder reports.

— Check out Practical Tips to Prepare for an SEC Exam on ThinkAdvisor.


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