On February 12, 2018, the Division of Enforcement of the Securities and Exchange Commission launched a self-reporting initiative to protect advisory clients from undisclosed conflicts of interest and return money to investors.
The Share Class Selection Disclosure Initiative (SCSD Initiative) states that the Division will not recommend financial penalty for investment advisers who report violations of the federal securities laws and return money (plus interest) to affected clients on their own. Instead, under the SCSD Initiative, the Division will recommend standardized, favorable settlement terms.
Over the past several years, the SEC has charged nine firms with failing to disclose such conflicts of interest. The charges included significant penalties and, as a result, returned millions of dollars to clients. The Commission with continue to monitor and address securities violations associated with mutual fund share class selection and any disclosure failures. Advisers will be unable to take advantage of the more lenient terms offered in the SCSD Initiative if they do not self-report.
Advisers interested in self-reporting have until June 12th, 2018, to send notice by email to SCSDInitiative@sec.gov or by mail to SCSD Initiative, U.S. Securities and Exchange Commission, Denver Regional Office, 1964 Stout Street, Suite 1700, Denver, Colorado 80294.
WHAT DOES THIS MEAN FOR ME?
Investment advisers must continue to be aware of their fiduciary duties when recommending and selecting share classes for their clients and, when related, continue to disclosure any conflicts of interest. A conflict of interest arises when an adviser directly or indirectly receives compensation from an affiliated broker-dealer for selecting a more expensive mutual fund share class for a client when a less expensive and appropriate share class is available for selection instead.
Fairview is committed to ensuring its clients are exhibiting the best compliance practices, like disclosing any relevant conflicts of interest in relation to mutual fund share class selection. Please contact Fairview if you have any questions or concerns about how the SCSD Initiative may affect your firm.