Its a limited time offer. The SECs Division of Enforcement will not impose financial penalties against advisory firms that voluntarily report placing clients in certain share classes when less expensive share classes for the same investment are available. Advisers taking advantage of this offer will still have to pay disgorgement and prejudgment interest, be censured and face the possibility of individual liability.
The SEC shows no sign of letting up in its scrutiny of investment advisory firms that place clients in more expensive share classes when less expensive class shares of the same securities are available. It reached a settlement with a small, financially troubled adviser last month, and early this month settled charges with a large financial institution, Credit Suisse, and one of its investment adviser representatives.
It was just nine months ago that the SEC issued a risk alert saying it would be looking hard at advisory firms that failed to disclose when placing clients in mutual fund share classes that are more expensive than others - and only three weeks later charged an adviser for doing just that. On March 29, however, that firm, in a settlement with the agency, walked away without having to provide disgorgement or pay any fines.
Allegations involving multiple SEC red flags came together this month when the agency reached a settlement with three AIG Advisor Group subsidiaries. The areas of SEC interest include placement of clients in funds with 12b-1 fees when less expensive funds are available, dually registered advisers involved in reverse churning, and advisers that fail to follow through on examination deficiencies.
Theres nothing wrong with putting clients into funds that charge fees for distribution - as long as you first let your clients know of any other funds you manage that do not charge such fees. Its also probably best to if your firm didnt receive those distribution fees.
Its the job of a mutual funds board of directors to police how shares are sold, and its the job of the funds adviser to provide the board with sufficient information to make that determination. That is the essence of the guidance update, "Mutual Fund Distribution and Sub-Accounting Fees," issued January 6 by the SECs Division of Investment Management.
The SEC doesnt like it when funds and advisers say they are paying for one kind of service when they actually are paying for another. Payments for sales of mutual fund shares are a case in point.
In her May 4 address before the Mutual Fund Directors Forum conference in Washington, D.C., SEC Chairman Mary Schapiro provided updates on a number of SEC rulemaking initiatives under the Investment Company Act: