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.