No matter how bad the share-class violation, SEC won't oppress those who self-report

Agency clarifies in FAQs that it will not impose a civil monetary penalty, but will require advisers return 'ill-gotten gains' to clients

May 1, 2018 @ 4:39 pm

By Mark Schoeff Jr.

Settlement amounts won't vary based on the severity of the violation in a Securities and Exchange Commission effort to crack down on high-fee mutual fund share classes, the agency said Tuesday.

Under its Share Class Selection Disclosure Initiative announced earlier this year, the SEC is encouraging investment advisers to report themselves to the agency by June 12 if they have put their clients into high-fee share classes when lower fee options were available in the same fund.

The agency is targeting advisers who have failed to disclose to clients that they receive revenue-sharing payments, or 12b-1 fees, to sell the funds. If advisers report themselves, the agency will not impose a civil monetary penalty but will require advisers to return "ill-gotten gains" to their clients.

Those parameters will stand regardless of the 'scope and severity' of the case, the agency said in a set of 19 frequently asked questions released Tuesday.

"The [Enforcement] Division does not plan to recommend fundamentally different settlement terms with any self-reporting adviser based on the 'the severity and scope' of the conduct," the FAQs state. "A self-reporting adviser should be prepared to enter into a settlement with the commission under the standardized settlement terms set forth in the announcement."

Another answer addresses disgorgement the SEC will seek and whether it will reduce the amount if advisers lower their advisory fees by the amount of revenue-sharing they receive.

"It depends on the facts and circumstances," the FAQs state.

The document put forth two examples. In one of them, the adviser says his fees would have been 1.25% without the revenue sharing. Another says she applied a portion of the 12b-1 fees to reduce her annual 1% fee.

"The division may recommend an offset to the disgorgement to the commission in circumstances like this second scenario," the FAQ states.

The SEC also clarified that the initiative does not target high-fee share classes in brokerage accounts.

"If the entity was not acting as an investment adviser in recommending, purchasing or holding 12b-1-fee-paying share classes when a lower-cost share class of the same fund was available, then that portion of the entity's business would not be eligible for the initiative," the FAQ states.


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