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SEC Likely to Make Examples of Share Class Violators, Lawyers Say

April 23, 2019

With the SEC’s recent settlement with advice firms that had participated in its 12b-1 fee violation self-reporting amnesty out of the way, the regulator is now likely to come down on firms as well as individuals that didn’t take up its offer of leniency, lawyers say, according to news reports.

Last month, the regulator ordered 79 firms, including Wells Fargo, LPL, and Raymond James Financial, among others, to pay back more than $125 million to clients who had been sold higher-priced mutual fund share classes than what was available to them, as reported.

These firms were the ones that took advantage of the SEC’s self-reporting offer, announced last February, when the regulator promised to not recommend financial penalties for those coming forward and merely require them to disgorge ill-gotten gains.

But the SEC’s Enforcement Division is now probing firms that didn’t self-report during the initiative, according to lawyers at Drinker Biddle & Reath, InvestmentNews writes.

"The quality and quantity of investment advisers’ disclosure of conflicts of interest is under the SEC’s microscope now," Fred Reish, partner at Drinker Biddle, said in a recent company webinar, according to the publication. "The SEC’s treatment of anybody they find during the enforcement investigations will be more demanding than it would have been in that initiative.”

Some of these firms — as well as individuals — are at risk of being made examples of, which could mean substantial penalties and additional charges, Drinker Biddle partner James Lundy and associate Benjamin McCulloch wrote in the April edition of the Investment Adviser Association’s newsletter, according to InvestmentNews.

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What’s more, the SEC’s enforcement division is likely to expand the scope of its scrutiny beyond the fees addressed in its self-reporting initiative, Amy Greer, partner at Morgan Lewis, tells the publication. The regulator’s probe could extend past the failure to disclose 12b-1 fees and include revenue-sharing fees, InvestmentNews writes.

By Alex Padalka
  • To read the InvestmentNews article cited in this story, click here.