SEC Announces Self-Reporting Initiative for Mutual Fund Share Class Disclosures

On February 12, 2018, the U.S. Securities and Exchange Commission’s Division of Enforcement (the “Division”) announced its Share Class Selection Disclosure Initiative (the “SCSD Initiative”). Under the SCSD Initiative, the Division will not recommend monetary penalties against investment advisers that self-report failures to make the required disclosures for mutual fund class shares that paid the adviser 12b-1 fees. Under the Investment Advisers Act of 1940, an investment adviser is required to disclose all conflicts of interest that might incline the adviser to provide advice that is not disinterested. Therefore, investment advisers are required to disclose conflicts of interest associated with recommending that clients invest in a mutual fund share class that pays the adviser a 12b-1 fee when a lower-cost share class in the same mutual fund is available. The Division’s announcement states that in recent years, it has filed numerous actions where the investment advisers: (1) failed to disclose that they had a conflict of interest because mutual funds offered a variety of share classes, including some that paid 12b-1 fees and others that did not; and (2) failed to disclose that they were, in fact, receiving 12b-1 fees due to the mutual fund share classes they bought for or recommended to their clients. Investment advisers that did not explicitly make these disclosures in Forms ADV should consider self-reporting under the SCSD Initiative.

To participate in the SCSD Initiative, an investment adviser must notify the Division before June 12, 2018 by email to SCSDInitiative@sec.gov or by mail to SCSD Initiate, U.S. Securities and Exchange Commission, Denver Regional Office, 1961 Stout Street, Suite 1700, Denver, Colorado 80294. Within ten business days of the notification to the Division, the investment adviser must submit a completed SCSD Initiative Questionnaire for Self-Reporting Advisers, which is available at https://www.sec.gov/divisions/enforce/scsd-initiative-questionnaire.pdf. The Questionnaire makes clear that the SCSD Initiative is focused on the adequacy of disclosures from January 1, 2014 to the present.

If an investment adviser meets the requirements of the SCSD Initiative, the Division will recommend a settlement that includes: (1) the investment adviser’s consent to the institution of an administrative and cease-and-desist proceeding; (2) an order to cease and desist further violations and a censure; (3) disgorgement and pre-judgment interest; and (4) compliance with a number of undertakings, including review and correction of relevant disclosure documents, evaluating whether existing clients should be moved into lower-cost share classes, evaluating and updating policies and procedures meant to prevent violations of the Advisers Act, and notifying clients of settlement terms. The Division will also recommend that the SEC not impose a civil penalty.