Investment Advisers Who Self-Reported Advisers Act Violations To Compensate Investors and Ensure Adequate Fee Disclosures
On March 11, 2019, the SEC announced that it settled charges against 79 investment advisers who will return more than $125 million to clients, with a substantial majority of the funds going to retail investors. The actions stem from the SEC’s Share Class Selection Disclosure Initiative, which the SEC’s Division of Enforcement announced in February 2018 in an effort to identify and promptly correct ongoing harm in the sale of mutual fund shares by investment advisers. The initiative incentivized investment advisers to self-report violations of the Advisers Act resulting from undisclosed conflicts of interest, promptly compensate investors, and review and correct fee disclosures. The orders issued address advisers who directly or indirectly received 12b-1 fees for investments selected for their clients without adequate disclosure, including disclosures that were inconsistent with the advisers’ actual practices.
The SEC’s orders found that the investment advisers failed to adequately disclose conflicts of interest related to the sale of higher-cost mutual fund share classes when a lower-cost share class was available. Specifically, the SEC’s orders found that the settling investment advisers placed their clients in mutual fund share classes that charged 12b-1 fees – which are recurring fees deducted from the fund’s assets – when lower-cost share classes of the same fund were available to their clients without adequately disclosing that the higher cost share class would be selected. According to the SEC’s orders, the 12b-1 fees were routinely paid to the investment advisers in their capacity as brokers, to their broker-dealer affiliates, or to their personnel who were also registered representatives, creating a conflict of interest with their clients, as the investment advisers stood to benefit from the clients’ paying higher fees.
SEC’s Division of Enforcement’s Share Class Selection Disclosure Initiative
In February 2018, the SEC’s Division of Enforcement announced the creation of the Share Class Selection Disclosure Initiative to address ongoing concerns that, despite the fiduciary duty imposed by the Advisers Act, an OCIE risk alert, Form ADV reminders, and numerous individual SEC enforcement actions, investment advisers were not adequately disclosing, or acting consistently with the disclosure regarding, conflicts of interest related to their mutual fund share class selection practices. These disclosure failures caused harm to investors, particularly retail investors, including being deprived of the ability to make informed investment decisions when purchasing higher-cost share classes. The initiative, which was managed by the Asset Management Unit, enabled investment advisory firms to avoid financial penalties if they timely self-reported undisclosed conflicts of interest, agreed to compensate harmed clients, and undertook to review and correct their relevant disclosure documents. To assist advisers evaluating their eligibility for the initiative, the Division of Enforcement issued answers to frequently asked questions, which provided detailed information about the eligibility of advisers to participate, calculation of disgorgement, and other aspects of the initiative.
The SEC staff is continuing to evaluate self-reports that were received from investment advisers prior to the initiative cut-off date.
The SEC’s orders found that the settling investment advisers violated Section 206(2) and, except with respect to state-registered only advisers, Section 207 of the Investment Advisers Act of 1940 by:
- Failing to include adequate disclosure regarding the receipt of 12b-1 fees; and/or
- Failing to adequately disclose additional compensation received for investing clients in a fund’s 12b-1 fee paying share class when a lower-cost share class was available for the same fund.
Without admitting or denying the findings, each of the settling investment advisers consented to cease-and-desist orders finding violations of Section 206(2) and, except with respect to state-registered only advisers, Section 207. The firms also agreed to a censure and to disgorge the improperly disclosed fees and distribute these monies with prejudgment interest to affected advisory clients. 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 should be moved to an available lower-cost share class and move clients, as necessary. Consistent with the terms of the initiative, the SEC has agreed not to impose penalties against the investment advisers.
Firms Charged by the SEC
- Ameritas Investment Corp.
- AXA Advisors LLC
- BB&T Securities LLC
- Beacon Investment Management LLC
- Benchmark Capital Advisors LLC
- Benjamin F. Edwards & Co. Inc.
- Blyth & Associates Inc.
- BOK Financial Securities Inc.
- Calton & Associates Inc.
- Cambridge Investment Research Advisors Inc.
- Cantella & Co. Inc.
- Client One Securities LLC
- Coastal Investment Advisors Inc.
- Comerica Securities Inc.
- Commonwealth Equity Services LLC
- CUSO Financial Services LP
- D.A. Davidson & Co.
- Deutsche Bank Securities Inc.
- EFG Asset Management (Americas) Corp.
- Financial Management Strategies Inc.
- First Citizens Asset Management Inc.
- First Citizens Investor Services Inc.
- First Kentucky Securities Corporation
- First National Capital Markets Inc.
- First Republic Investment Management Inc.
- Hazlett, Burt & Watson Inc.
- Hefren-Tillotson Inc.
- Huntington Investment Company, The
- Infinex Investments Inc.
- Investacorp Advisory Services Inc.
- Investmark Advisory Group LLC
- Investment Research Corp.
- J.J.B. Hilliard, W.L. Lyons LLC
- Janney Montgomery Scott LLC
- Kestra Advisory Services LLC
- Kestra Private Wealth Services LLC
- Kovack Advisors Inc.
- L.M. Kohn & Company
- LaSalle St. Investment Advisors LLC
- Lockwood Advisors Inc.
- LPL Financial LLC
- M Holdings Securities Inc.
- MIAI Inc.
- National Asset Management Inc.
- NBC Securities Inc.
- Next Financial Group Inc.
- Northeast Asset Management LLC
- Oppenheimer & Co. Inc.
- Oppenheimer Asset Management Inc.
- Park Avenue Securities LLC
- PlanMember Securities Corporation
- Popular Securities LLC
- Principal Securities Inc.
- Private Portfolio Inc.
- ProEquities Inc.
- Provise Management Group LLC
- Questar Asset Management Inc.
- Raymond James Financial Services Advisors Inc.
- Raymond Lawrence Lent (d/b/a The Putney Financial Group, Registered Investment Advisors)
- RBC Capital Markets LLC
- Robert W. Baird & Co. Incorporated
- Ryan Financial Advisors Inc.
- SA Stone Investment Advisors Inc.
- Santander Securities LLC
- Select Money Management Inc.
- Silversage Advisors
- Sorrento Pacific Financial LLC
- Spire Wealth Management LLC
- SSN Advisory Inc.
- Stephens Inc.
- Stifel, Nicolaus & Company Incorporated
- Summit Financial Group Inc.
- Syndicated Capital Inc.
- TIAA-CREF Individual & Institutional Services LLC
- Transamerica Financial Advisors Inc.
- Trustcore Financial Services LLC
- Wells Fargo Clearing Services LLC
- Wells Fargo Advisors Financial Network LLC
- Woodbury Financial Services Inc.