The SEC Division of Enforcement announced an initiative aimed at incentivizing firms to self-report violations of the federal securities laws relating to certain mutual fund share class selection issues. Such initiative would decrease the civil penalties ordinarily associated with violations and would instead require violators to disgorge its illegal profits and pay those amounts to harmed clients, without additional penalty.
Through the "Share Class Select Disclosure Initiative" ("SCSDI"), the Division will not recommend financial penalties if an investment adviser self-reports a failure to disclose conflicts of interest associated with fees received by the adviser or associated entities pursuant to Investment Company Act Rule 12b-1 when a lower-cost share class of the same mutual fund is available. Advisers are required to inform investors of any conflicts of interest in connection with the receipt of such fees.
The Division noted that entities who engaged in misconduct related to conflicts of interest for 12b-1 fees and failed to self-report such violations can expect stronger sanctions. It cautioned that eligible advisers that take advantage of the SCSDI may be required to undertake further remedial actions, including notifying clients of any settlement, updating policies and procedures, and evaluating whether other clients should be moved to a lower-cost share class.
Commentary / Kyle DeYoung
This new disclosure initiative continues the SEC's focus on conflicts of interest associated with mutual fund share class selection. Investment advisers that receive 12b-1 fees and who may have issues with their mutual fund share class selections will want to carefully review their disclosure practices and past share class selections to evaluate whether it makes sense to participate in the self-reporting initiative. Self-reporting under the initiative would allow investment advisers to avoid civil money penalties, which have ranged from $25,000 to over $1.1 million in recent enforcement actions related to share class selection. Investment advisers have until June 12, 2018 to notify the SEC of their intent to self-report potential violations to take advantage of the standardized settlement terms.
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