Oppenheimer Proposes Mutual Fund Share-Class Settlement
In one of the first examples of firms seizing on the Securities and Exchange Commission’s amnesty program for self-reporting mutual fund sales violations, Oppenheimer & Co. is offering to return about $3.5 million to customers who could have bought less expensive share classes sold between 2014 and mid-2018.
The New York-based firm filed an offer of settlement with the SEC three weeks ago that would require it to disgorge the 12b-1 fees it collected over the period, and to evaluate whether clients should be moved to a lower-cost share class, according to Oppenheimer’s 2018 10-K annual report that it filed on Friday.
The SEC in February 2018 unveiled a four-month program in which it offered to waive civil monetary penalties and recommend “favorable settlement terms” to firms that admitted they failed to inform customers they had conflicts of interest in selling share classes that paid them ongoing commissions in the form of 12b-1 fees.
The regulator has not disclosed how many advisory firms took up the offer, but its enforcement division co-head Steven Peikin said in November that regulators expects “lots of money” to be returned to investors as a result of the program.
SEC spokesman Chris Carofine on Friday declined to say whether the agency has to date accepted any settlement offers from advisory firms that participated in the program.
Those that fessed up must disgorge their ill-gotten gains, with interest—and accept censures and orders to cease and desist from future violations—but will not have to pay penalties, according to the outlines of the program that the SEC ended in mid-June.
In addition to disgorging the $3.5 million, Oppenheimer will evaluate whether clients should be moved to lower-cost share classes within 30 days of acceptance of its offer and to review and correct all relevant disclosure documents within that time period, according to its 10-K filing.
Participation in the SEC’s self-reporting project was voluntary, but securities lawyers say that the regulator has begun investigating firms suspected of having failed to properly disclose the incentives they have to sell fund-share classes that pay them 12b-1 fees.
In December, the SEC began sending request letters to firms that did not participate in the program but are under suspicion for 12b-1 disclosure violations, according to a legal alert from the law firm Eversheds Sutherland. It warned that the SEC enforcement staff could recommend penalties for violations that “could be greater than those imposed in past cases.”
In unveiling the self-disclosure program, the SEC said it had imposed “significant penalties” against nine investment advisory firms in recent years, and has repeatedly cautioned investment advisers and other market participants to examine their share class selection policies and procedures and disclosure practices.