Wednesday, February 14, 2018

Share Class Selection Disclosure Initiative

Share Class Selectrion Disclosure Initiative

On February 12, 2018, the U.S. Securities and Exchange Commission ("SEC") released their Share Class Selection Disclosure Initiative. This communication is right on the heels of its 2018 Examination Priorities [issued February 7, 2018], where the SEC noted its focus on investors being in higher cost share classes or those with a conflict of interest not fully disclosed.

Under the Share Class Selection Disclosure Initiative, the SEC is offering amnesty to Advisors that self-report that they failed to disclose conflicts of interest related to recommendations of funds with a 12b-1 fee when lower cost share classes were available to the investor. Please note the following from the SEC’s announcement:

“The investment adviser "received" 12b-1 fees if (1) it directly received the fees, (2) its supervised persons received the fees, or (3) its affiliated broker-dealer (or its registered representatives) received the fees.”

Advisors have until June 12, 2018 to self-report as part of this initiative. By self-reporting, eligible advisors will have to pay back the difference of the 12b-1 fees versus the fees of the lower cost share class. The SEC will conduct a look back of fees earned since January 1, 2014. In return, the SEC will not impose civil penalties related to the lack of disclosures for any Advisor that self-reports.

It is important to note that Advisors already involved in an enforcement action do not qualify for this initiative. If Advisors are subject to a pending SEC examination, you are still eligible to self-report, however.

Advisor Insights:

  • Run a report of all recommendations of mutual funds where you earned a 12b-1 fee (since 2014).
  • Identify if a lower cost share class was available for the same fund at the time of the recommendation. If yes:
    • Were explicit disclosures provided to the client of the conflict of interest that you recommended a more expensive share class when a lower fee share class was available.
    • Consider conducting an analysis to calculate the difference of the 12b-1 fees earned versus the lower cost share class.
  • Investments in share classes other than the lowest share class is not necessarily an issue. For example, the Advisor may use “no transaction fee” or “NTF” funds in certain instances. As a fiduciary, it is important to evaluate what is in the best interest of the client. A smaller position or more frequently-traded position may be best suited to an NTF product. However, the SEC has raised concerns of Advisors in wrap fee programs [that absorb fees] utilizing NTF funds in a more costly wrap structure.

If Advisors have any questions on whether to self-report, AdvisorAssist recommends that you contact legal counsel. Self-reporting is done with the SEC’s Enforcement Division, who will then recommend a settlement in which the Advisor neither admits nor denies the findings. However, the Advisor will be required to consent to the institution of an administrative and cease-and-desist proceeding under Sections 203(e) and 203(k) of the Advisers Act for violations of Sections 206(2) and 207 of the Advisers Act based on the adviser's failure to disclose the conflict of interest.

If you would like additional information about the SEC’s Share Class Initiative, please refer to the SEC’s Share Class Selection Disclosure Initiative announcement or contact your Compliance Consultant or

AdvisorAssist Team