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Regulation and Compliance > Federal Regulation > SEC

SEC Releases FAQ on 12b-1 Fee Initiative

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SEC headquarters in Washington. (Photo: National Law Journal)SEC headquarters in Washington. (Photo: National Law Journal) SEC headquarters in Washington. (Photo: National Law Journal)

The Securities and Exchange Commission’s enforcement unit on Tuesday issued frequently asked questions guidance on its Share Class Selection Disclosure Initiative, which provides more information about advisor eligibility, disgorgement as well as the distribution of funds to clients.

Stephanie Avakian, co-director of the agency’s enforcement division, said in mid-April that the FAQs was forthcoming, as the division has received “a number of questions” about the voluntary program.

The deadline for firms to self-report share class violations is June 12.

Under the SCSD Initiative, the Enforcement Division will recommend standardized, favorable settlement terms to investment advisors who 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.

In such cases the Enforcement Division will recommend settlements that do not impose a civil monetary penalty while requiring participating advisors to return ill-gotten gains to harmed clients.

C. Dabney O’Riordan, co-chief of the division’s Asset Management Unit, said in releasing the FAQ that “it appears that many investment advisors are working diligently to evaluate whether they can take advantage of the initiative and we believe that providing these FAQs will help them make that determination.”

The initiative, he said, “provides a framework to quickly and efficiently resolve these issues with self-reporting advisers and return money to their clients.”

One question and answer, for instance, asks if the SCSD Initiative applies to instances in which an advisor failed to disclose a conflict with respect to other fees it received in connection with recommending, purchasing, or holding a higher-cost share class, i.e., not just 12b-1 fees.

The SEC’s answer: “The standardized settlement terms outlined in the Announcement apply only to the conduct identified in the Announcement and only to those advisors that meet the definition of a ‘Self-Reporting Advisor’ and have self-reported their conduct in the prescribed manner.”

Another question states that the agency’s Office of Compliance Inspections and Examinations has already examined a firm on these share class issues. “Does this exam make my advisory firm ineligible for the SCSD Initiative or immune from future enforcement action regarding these issues?”

The SEC’s answer: “No. If an advisor has been or is being examined, the only way to ensure the Division will recommend the favorable settlement terms outlined in the Announcement (e.g., a recommendation that the Commission accept a settlement without a civil penalty) is for the advisor to self-report in the manner described in the Announcement.”

Advisors that have been or are being examined by OCIE regarding the issues covered by the SCSD Initiative but, as of Feb. 12, “had not been contacted by the Division ‘regarding possible violations related to their failures to disclose the conflicts of interest associated with mutual fund share class selection,’ are eligible, regardless of the outcome of the exam,” the FAQ states.

Interactions the advisor had with OCIE “do not constitute self-reporting under the SCSD Initiative,” the SEC states. “Division staff will exercise its discretion in determining whether to recommend enforcement action to the Commission.”

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