On February 12, 2018, the U.S. Securities and Exchange Commission (SEC or Commission) issued a press release announcing the Share Class Selection Disclosure Initiative (SCSD Initiative) to encourage investment advisers to self-report certain violations of the Investment Advisers Act (Advisers Act) relating to selection of mutual fund share classes. Under the SCSD Initiative, the SEC Division of Enforcement will show relative leniency toward investment advisers who self-report violations relating to share class conflicts of interest from the receipt of Rule 12b-1 fees. For those self-reporting advisers, the Enforcement Division will recommend favorable settlement terms, including no civil money penalty, in any resulting enforcement action. The SCSD Initiative aligns with the Clayton Commission’s emphasis on retail investor protection and its desire to allocate the SEC’s resources efficiently. Stephanie Avakian, Co-Director of the Enforcement Division, commented on this theme in the initiative’s accompanying release by saying, “This focused initiative reflects our effort to allocate our resources in a way that effectively targets the continued failure by some advisers to disclose conflicts of interest around share class selection and, importantly, is intended to facilitate the prompt return of money to victimized investors.”1
What is the SEC Offering?
Section 206(2) of the Advisers Act prohibits advisers from engaging in fraudulent transactions, and the courts have interpreted it as imposing a duty to disclose conflicts of interest to clients.2 The SCSD Initiative aims to incentivize advisers to report failures to disclose conflicts of interest related to Rule 12b-1 fees3 by offering them “settlements that will require the adviser to disgorge its ill-gotten gains and pay those amounts to harmed clients, but not impose a civil monetary penalty.”4 Steven Peikin,
Co-Director of the Enforcement Division, emphasized that the favorable settlement terms offered by the initiative will not be available to advisers who fail to self-report and later find themselves in the Enforcement Division’s crosshairs, stating, “We strongly encourage advisers to take advantage of the favorable terms we are offering; these terms will not be available to advisers who do not self-report under this initiative, and we will continue to proactively seek to identify and pursue investment advisers that fail to make the necessary disclosures.”5
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