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 01, 2018

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.

Latest News

Merrill to pay $39 million in cash sweep settlement
Merrill to pay $39 million in cash sweep settlement

The financial advice industry has been facing inquiries into its cash sweep programs for years now.

SEC accuses fund advisor of defrauding SpaceX, OpenAI investors
SEC accuses fund advisor of defrauding SpaceX, OpenAI investors

Investor money allegedly went to strip clubs, exotic cars, and landscaping

RIA moves: Savant enters Thousand Oaks as Procyon lands in New Jersey
RIA moves: Savant enters Thousand Oaks as Procyon lands in New Jersey

Procyon adds $415 million in assets under management in New Jersey while Savant picks up a $213 million Southern California planning firm

Beyond sell or inherit: A third exit for appreciated property
Beyond sell or inherit: A third exit for appreciated property

With a growing number of real estate-rich Baby Boomers aging into retirement, some advisors may be failing to consider all the options available for those clients' assets.

AI marketing adoption gap costs financial firms revenue
AI marketing adoption gap costs financial firms revenue

Cornerstone Advisors study reveals compliance bottlenecks stall campaigns weeks after customer opportunities close.

SPONSORED In the Age of AI, Trust Becomes the Advisor's Greatest Asset

As AI makes financial information more accessible than ever, Lana Hock explains why human judgment, trust, and empathy remain the qualities clients value most in a financial advisor

SPONSORED Direct indexing webinar targets tax-loss harvesting amid market swings

Northern Trust’s Ken Lassner shows advisors how to convert volatility into after-tax portfolio gains