The SEC Starts a Four-Month, Share-Class-Disclosure Countdown
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Tuesday, February 13, 2018

The SEC Starts a Four-Month, Share-Class-Disclosure Countdown

The SEC's Stephanie Avakian and Steven Peikin just made regulators' latest move against higher-fee mutual fund share classes, in the form of a carrot (or least a less painful stick) offered to the RIAs. Though the regulatory agency's new move will not directly push RIAs away from any particular share classes (say, A or C shares with baked-in 12b-1s), it will probably make it easier for RIAs to shift away from those share classes into institutional or clean shares.

Yesterday afternoon Avakian and Peikin, co-directors of the Securities and Exchange Commission's division of enforcement, unveiled the "Share Class Selection Disclosure Initiative" (SCSD). Under the SCSD, for RIAs who fess up to not disclosing potential conflicts associated with higher fee share classes and who self-report by June 12, the SEC will recommend a standardized settlement that only involves making investors whole (by the RIAs disgorging fees they received from the higher fee share classes) without adding on any kind of "civil monetary penalty." From the sound of things, after the SCSD window ends, RIAs who come under fire for these issues can expect stiffer penalties.

InvestmentNews and ThinkAdvisor both followed up on the news.

"We strongly encourage advisers to take advantage of the favorable terms we are offering," Peikin states. "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."

The main idea of the initiative, Avakian states, is "to facilitate the prompt return of money to victimized investors."

The SEC's move here follows a host of SEC and Finra enforcement actions going back to 2014, all around FAs' use of inappropriate share classes (and about the B-Ds, banks, or RIAs those FAs worked with) — in some of the Finra cases, like under this new SEC program, B-Ds who self-reported their share class issues only faced disgorgement while dodging fines.

Meanwhile, even as regulators push, the retail wealth management world seems to be shifting away from high fee share classes, too. At least one RIA custodian last year revealed that lower priced institutional shares now utterly dominate flows on its NTF (no transaction fee) platform.

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