Initial results of the SEC's Share Class Disclosure Initiative indicate a heightened focus on disclosures made to retail investors and consequences for any failure to self-report.
On February 12, 2018, the U.S. Securities and Exchange
Commission launched its "Share Class Selection Disclosure
Initiative" ("SCSDI"), which provided incentives to investment advisers to
self-report violations of the federal securities laws related to
undisclosed conflicts of interest in mutual fund share class
selections. In establishing the initiative, the SEC warned that any
failure by a firm to self-report under the initiative would likely
result in even more significant sanctions.
Thirteen months later, on March 11, 2019, the SEC announced the results of the initiative: settled charges
filed against 79 investment advisers returning more than $125
million to investors. The SEC's orders generally found that the
investment advisers placed clients in mutual fund share classes
that charged recurring fees deducted from the funds' assets,
even though lower-cost share classes were available. This benefited
the investment advisers and their affiliated broker-dealers at the
expense of their clients, and the advisers' disclosure of this
conflict was inadequate.
Key Points
The SEC staff continues to evaluate self-reports received prior to
the initiative cut-off date. The public announcement did not
address instances involving allegedly wrongful conduct that were
not self-reported. Where it can establish such allegations, the SEC
may file additional cases that impose civil penalties to
demonstrate consequences for not self-reporting.
The initial SCSDI announcement indicated that these potential
conflict of interest issues had also been identified through the
National Exam Program and were featured in a 2016 OCIE Risk Alert. In light of the SCSDI,
it is unlikely that firms that have these kinds of conflict of
interest issues identified in routine examinations will be
permitted to remediate the deficiencies solely through the OCIE
program.
Initiatives such as the SCSDI provide a broad mechanism for the SEC
to address what it believes to be wrongful market-related conduct
while conserving resources. In an environment in which there are
intense budgetary pressures and an immense focus on enforcement
numbers—combined with the loss of one month of enforcement
activity due to the partial government shutdown—expect the
Enforcement Division to continue to identify other potential
initiatives that could provide a path to streamlined
resolutions.
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