SEC Back-Pats Its Share-Class Disclosure Initiative
The Securities and Exchange Commission’s recently ended program of offering favorable settlements to firms that confessed to selling high-fee mutual fund share classes without proper disclosure to customers yielded “scores and scores” of self-reports, an agency official said.
“We expect there’s going to be lots of money returned to investors under the program,” Steven Peikin, co-head of the SEC’s enforcement division, said at a conference in New York last week sponsored by the Practicing Law Institute.
The Share Class Selection Disclosure Initiative, which ended on June 12, offered immunity from fines to investment advisor firms that admitted that they, their affiliates or their brokers did not disclose conflicts of interest associated with 12b-1 fees to customers who could have purchased less expensive shares that were available. The program involved sales from January 2014 through this June.
Firms that fessed up must still “disgorge” their ill-gotten gains with interest and accept censures and orders to cease and desist from future violations. Broker-dealers that are dually registered as investment advisers, a large part of the brokerage industry, have been closely watching the results to determine the wisdom of those who participated.
Peikin did not give specific numbers nor say how much money the SEC expects to be returned, but he vigorously defended the leniency approach.
“Unless we did exams of all the investment advisors, we wouldn’t find this stuff,” he said. “It’s an opportunity, at some cost, to get money back into the pockets of investors.”
The SEC historically examines fewer than 12% of registered investment advisory firms annually.
Peikin said the regulator is “open-minded” about starting similar self-disclosure programs in other enforcement areas. The SEC has said that its decision to focus on mutual fund fees came because conflict-of-interest disclosure failures were continuing despite its having assessed significant fines against 15 firms from 2013 to the end of 2017.
“We had seen over a period of years a series of cases brought, yet in exams, we’re still seeing pervasive misconduct,” Peikin said.
Several firms in recent weeks told investors that they participated in the disclosure program.
Ladenburg Thalmann Financial Services has reserved $2.27 million for expected disgorgements from three of its five independent dually registered brokerage firms that self-reported, the Florida-based firm said In its third-quarter earnings filings last week.
Oppenheimer & Co.’s quarterly filing said in a section on its potential legal liability that it opted into the self-disclosure program on June 11—a day before the program ended—and may have to disgorge 12b-1 fees to “certain clients.”
The Financial Industry Regulatory Authority is wrapping up its own examination of broker-dealers over improper fund class sales and failure to offer discounts to eligible customers.
Independent broker-dealer Commonwealth Financial last week accepted a Finra censure and agreed to reimburse $888,000 to charitable and retirement account customers who failed to receive sales charge waivers on Class A fund shares.
When the SEC announced its self-disclosure program in February, it referenced that it had “close to a dozen” investigations of firms ongoing regarding share class conflict-of-interest disclosure. It specifically cited the receipt of 12b-1 fees “when a lower-cost share class of the same mutual fund was available for the advisory clients.”
Brokers and/or firms collect a 12b-1 commission annually from fund companies for the entire time that investors hold such shares.
Some SEC enforcement cases regarding mutual fund pricing are still pending.
Jones Financial Co., the parent of broker-dealer Edward Jones, said in its quarterly earnings report this week that the SEC continues to investigate whether it offered sales charge waivers to eligible retirement plans and charitable accounts. Jones in the first nine months of 2018 derived about 70% of it total nine-month revenue of $6.32 billion from sales and services related to mutual fund and insurance products, the filing said.