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Do You Want the SEC Fee Violation Amnesty? Read This ...

By Rita Raagas De Ramos May 2, 2018

On the heels of its offer of amnesty for advisors who self-report share-class fee violations and return funds to harmed investors, the SEC Tuesday issued answers to frequently asked questions of advisors contemplating taking advantage of the reprieve.

“It appears that many investment advisors are working diligently to evaluate whether they can take advantage of the initiative and we believe that providing these FAQs will help them make that determination,” C. Dabney O’Riordan, co-chief of the SEC enforcement division’s asset management unit.

Under the Share Class Selection Disclosure (SCSD) Initiative announced by the SEC in February, the regulator “will agree not to recommend financial penalties” for advisors who self-report failure to disclose receipt of 12b-1 fees in recommending mutual fund share classes when lower-priced share classes of the same mutual fund were available. Instead, the SEC says it “will recommend standardized, favorable settlement terms to advisors who self-report by June 12.”

The SEC says advisors who participate in the SCSD Initiative can expect the regulator to recommend settlements requiring them to disgorge ill-gotten gains but not pay a civil monetary penalty.

The FAQs provide advisors with additional information about eligibility for the amnesty, disgorgement, and the distribution of funds to clients.

The answers to the FAQs explain, among other things, that:

  • There is no minimum threshold for proposed disgorgement amounts when self-reporting.
  • The enforcement division doesn’t plan to recommend fundamentally different settlement terms with any self-reporting advisor based on “the severity and scope” of the conduct.
  • Advisors who have been or are being examined by Office of Compliance Inspections and Examinations (OCIE) on share-class fee violations but had not been contacted by the regulator as of February 12 about “possible violations” related to their failures to disclose the relevant conflicts of interest are eligible, regardless of the outcome of the exam.
  • The individual should have been acting as an investment advisor when recommending, purchasing the relevant share classes to be eligible.
  • The self-reporting advisor must disclose both the conflict associated with making the investment decision and the conflict with selecting the more expensive share class.

(Getty)

The answers to the FAQs also list examples of when a lower-cost share class could have been available to an investor for the same fund:

  • The client could have purchased a lower-cost share class for the same fund because the client’s investment met the applicable investment minimum.
  • There was or is language in the fund prospectus that says the fund will waive the investment minimum for a lower-cost share class for the same fund for advisory clients.
  • There was or is language in the fund prospectus that says the fund may waive the investment minimum for a lower-cost share class for the same fund for advisory clients, and the advisor had no reasonable basis to believe the fund would not waive the investment minimum for a lower-cost share class for its advisory clients.
  • The investment advisor purchased a lower-cost share class of the same fund for other similarly-situated clients.

An FA-IQ straw poll shortly after the announcement in February of the SCSD Initiative shows that if the respondents indeed had share-class fee violations, half of them would take advantage of the amnesty and self-report and the rest wouldn’t.