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SEC Announces Self-Reporting Initiative On Investment Adviser Share Class Selection

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02.15.2018 | Legal Update

On February 12, 2018, the U.S. Securities and Exchange Commission (“SEC”) Enforcement Division announced a new initiative in its continued effort to seek reimbursement for clients of fee-based investment advisers which failed to recommend the cheapest available mutual fund share class. Specifically, the Share Class Self-Disclosure (“SCSD”) Initiative targets advisers which recommended share classes charging sales-related (“12b-1”) fees when a cheaper, non-12b-1 fund share class was available, received the 12b-1 fees from the funds, and failed to clearly disclose that practice to clients. This Initiative asks investment advisers to self-report instances of such practices by June 12, 2018. Advisers who timely self-report to the to the SEC, and who meet a number of other conditions, may be eligible for a settlement involving only customer remediation and non-financial terms, without incurring any civil penalty.

The SEC’s offer is not as simple as it first appears. It has several conditions and should be approached only after a thorough investigation into an adviser’s activities and after careful consideration of the legal implications. For example, though eligible companies may be able to settle without paying civil penalties, their officers, registered representatives and other individuals are not eligible for the self-reporting exemption, and may be held liable for their own conduct. Moreover, the initiative specifically excludes from its protections any other compliance issues discovered during the disclosure process, which could become subject to a separate investigation and enforcement.

For these and other reasons, investment advisers should conduct a careful analysis of their factual record and legal issues before making a decision with respect to the SCSD Initiative.

This advisory was prepared by Ian Roffman, partner and chair of Nutter’s Litigation Department, and Mark Jensen, Of Counsel in the firm’s Litigation Department. For more information, please contact Ian, Mark, or your Nutter attorney at 617.439.2000.

This advisory is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.

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