The retail investor focus of the current SEC Enforcement Program was on full display as the Division announced the return of over $125 million to investors from advisers participating in the Share Class Selection Disclosure Initiative announced about one year ago. Essentially, the Initiative promised advisers who self-report and agreed to comply with specified terms that the settlement would be on standardized terms without a penalty.
The Initiative was the outgrowth of a series of enforcement actions centered on situations were advisers affiliated with a broker-dealer put aside their obligation to act in the best interest of the client as a fiduciary in favor of their self-interest because of an undisclosed conflict of interest. For example, where the adviser was purchasing mutual funds for the client, frequently there was a choice of different classes of shares which are essentially identical except for the cost and certain fees that are paid. Shares that paid 12b-1 fees were typically more expensive than Institutional Class shares which do not carry such fees but cost less to purchase. In the enforcement actions which led to the initiative the adviser chose self-interest, purchasing shares that had the fees but required the investor to pay a higher price. See, e.g. In the Matter of SunTrust Investment Services, Inc., Adm. Proc. File No. 3-18178 (Sept. 14, 2017); In the Matter of Cadaret, Grant & Co., Adm. Proc. File No. 3-18087 (August 1, 2017).
The program is a clear success. Over $125 million is being returned to investors, paid by 79 advisers. Each adviser self-reported, consented to the entry of a cease and desist order by based on Advisers Act Sections 206(2) and 207 (except state advisers), returned the funds to the investors and corrected its disclosure documents while avoiding a penalty. The program is clearly a win for all – investors are repaid, the Division halted the conduct while conserving resources and the advisers resolved the situation without a penalty.