On March 11, 2019, the SEC announced settlements with 79 investment advisers that self-reported violations of the Investment Advisers Act of 1940 in connection with the SEC’s Share Class Selection Disclosure Initiative. The SEC’s Division of Enforcement launched the initiative in February 2018 to “promptly remedy potential widespread violations” of federal securities laws relating to an investment adviser’s selection of mutual fund share classes for clients that pay a 12b-1 fee to the adviser or its affiliates notwithstanding the availability of a lower-cost share class of the same fund. With the initiative, the SEC sought to incentivize eligible advisers to self-report federal securities law violations associated with undisclosed conflicts of interest concerning this share class selection practice by offering certain standardized settlement terms without the imposition of a civil penalty.
Without admitting or denying the findings, each of the settling investment advisers consented to cease-and-desist orders finding violations of applicable sections of the Advisers Act, agreed to a censure and agreed to disgorge the improperly disclosed fees and distribute these monies with prejudgment interest to affected advisory clients. According to the SEC’s press release, each adviser has also undertaken to review and correct all relevant disclosure documents concerning mutual fund share class selection and 12b-1 fees and to evaluate whether existing clients’ assets should be moved to an available lower-cost share class.
The SEC’s announcement and links to each adviser’s order settling the administrative proceeding are available at: https://www.sec.gov/news/press-release/2019-28