The Securities and Exchange Commission (“SEC”) has made a concerted effort over the last several years to address investment advisers’ conflicts of interests and to establish standards for associated disclosure failures (unfortunately) through a series of settled enforcement actions. Many of these enforcement actions have focused on insufficient conflict disclosures regarding mutual fund share class selection, and the failure by advisers to use in wrap programs or otherwise the least expensive mutual fund share class for which the client or program is eligible, ostensibly so that the adviser or its broker-dealer affiliate could collect Rule 12b-1 fees. In February, the SEC’s Division of Enforcement (“Division”) announced that it was providing registered investment advisers an opportunity to self-report instances of inadequately disclosed conflicts relating to the selection of mutual fund share classes and receipt of 12b-1 fees. By self-reporting, eligible advisers stand to gain favorable settlement terms including: (i) institution of an administrative and cease-and-desist proceeding in which the investment adviser neither admits nor denies the findings of the SEC; and (ii) the payment of remediation to clients without incurring any civil penalties.

Originally published in the IAA Newsletter - July, 2018.