SEC Looks to Save Self-Reporting Advisers Cash in High-Fee Cases

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By Andrew Ramonas

Investment advisers could avoid millions of dollars in fines under a new SEC program that encourages them to contact the agency about mutual fund clients they placed into high-fee share classes when cheaper alternatives existed.

The Securities and Exchange Commission’s enforcement lawyers won’t recommend financial penalties for advisers who self-report securities law violations concerning mutual fund class selection issues as part of the Share Class Selection Disclosure Initiative unveiled Feb. 12. The advisers, however, still must return ill-gotten gains to harmed clients.

Advisers have a fiduciary duty under the Investment Advisers Act of 1940 to disclose all conflicts of interest, including compensation received for picking a more expensive mutual fund class for a client. The SEC has brought at least nine high-fee cases since 2013, netting the agency and investors millions of dollars.

Fines in the cases often exceeded $100,000, sometimes rising to more than $1 million. The penalties included fines of $7.5 million against three American International Group affiliates in 2016 and $4.1 million against Credit Suisse Securities (USA) LLC and a former adviser in 2017 as part of settlements with the SEC.

Advisers improperly putting clients in high-fee share classes when cheaper alternatives exist likely will see tougher sanctions if they don’t take part in the initiative and the SEC catches them, according to the commission.

“This focused initiative reflects our effort to allocate our resources in a way that effectively targets the continued failure by some advisers to disclose conflicts of interest around share class selection and, importantly, is intended to facilitate the prompt return of money to victimized investors,” Stephanie Avakian, co-director of the SEC’s Division of Enforcement, said in a statement.

Advisers must contact the SEC no later than June 12 to participate in the program.

To contact the reporter on this story: Andrew Ramonas in Washington at aramonas@bloomberglaw.com

To contact the editor responsible for this story: Seth Stern at sstern@bloomberglaw.com

For More Information

Share Class Selection Disclosure Initiative: https://www.sec.gov/enforce/announcement/scsd-initiative

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