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Regulation and Compliance > Federal Regulation > SEC

Advisors to Return $125M in 12b-1 Fees Under SEC Share Class Initiative

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The Securities and Exchange Commission said Monday that 79 investment advisors will return $125 million to clients as part of settled actions for directly or indirectly receiving 12b-1 fees for investments selected for clients without adequate disclosure, including disclosures that were inconsistent with the advisors’ actual practices.

The orders issued Monday are part of the agency’s Share Class Disclosure Initiative, which was launched by the securities regulator’s enforcement division last February to identify and correct ongoing harm in the sale of mutual fund shares by investment advisors.

The SEC said “a substantial majority” of the $125 million will go to retail investors.

The 79 advisors include Wells Fargo Advisors Financial Network and Wells Fargo Clearing, Next Financial, Deutsche Bank, Cambridge Investment Research, Kestra Advisory Services and LPL Financial.

The initiative incentivized advisors to self-report violations of the Advisers Act resulting from undisclosed conflicts of interest, promptly compensate investors, and review and correct fee disclosures.

The SEC’s orders found that the investment advisors failed to adequately disclose conflicts of interest related to the sale of higher-cost mutual fund share classes when a lower-cost share class was available.

Specifically, “the SEC’s orders found that the settling investment advisors placed their clients in mutual fund share classes that charged 12b-1 fees — which are recurring fees deducted from the fund’s assets — when lower-cost share classes of the same fund were available to their clients without adequately disclosing that the higher cost share class would be selected,” the SEC said.

According to the SEC’s orders, the 12b-1 fees were routinely paid to the investment advisors in their capacity as brokers, to their broker-dealer affiliates, or to their personnel who were also registered reps, creating a conflict of interest with their clients, as the investment advisors stood to benefit from the clients’ paying higher fees.

“The federal securities laws impose a fiduciary duty on investment advisors, which means they must act in their clients’ best interest,” said Stephanie Avakian, co-director of the SEC’s Division of Enforcement, in announcing the settlements. “An advisor’s failure to disclose these types of financial conflicts of interest harms retail investors by unfairly exposing them to fees that chip away at the value of their investments.”

Steven Peikin, co-director of the enforcement division, said the initiative “leveraged the expertise of the agency in crafting an efficient approach to remedy a pervasive problem. Most of the advisory clients harmed by the disclosure practices were retail investors, and in just a year’s time, we made tremendous headway in putting money back into their hands while significantly improving the quality of firms’ disclosures.”

The SEC’s orders found that the settling advisors violated Section 206(2) and, except with respect to state-registered only advisors, Section 207 of the Investment Advisers Act of 1940 by:

  • Failing to include adequate disclosure regarding the receipt of 12b-1 fees; and/or
  • Failing to adequately disclose additional compensation received for investing clients in a fund’s 12b-1 fee paying share class when a lower-cost share class was available for the same fund.

Without admitting or denying the findings, each of the settling advisors consented to cease-and-desist orders finding violations of Section 206(2) and, except with respect to state-registered only advisors, Section 207.

The firms also agreed to a censure and to disgorge the improperly disclosed fees and distribute these monies with prejudgment interest to affected advisory clients.

Each advisor has also undertaken to review and correct all relevant disclosure documents concerning mutual fund share class selection and 12b-1 fees and to evaluate whether existing clients should be moved to an available lower-cost share class and move clients, as necessary.

Consistent with the terms of the initiative, the commission has agreed not to impose penalties against the advisors.

— Check out Regulators Take Aim at Share Class Disclosure on ThinkAdvisor.


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