Firms settle with SEC over undisclosed mutual fund trailer fees

U.S. securities regulators announced a series of settlements with dozens of investment advisory firms that will see US$125 million returned to investors, after the firms confessed to failing to properly disclose their receipt of mutual fund trailer fees.

The U.S. Securities and Exchange Commission (SEC) announced that it has settled charges against 79 investment advisers who self-reported violations of securities rules involving the disclosure of ongoing mutual fund fees (known as 12b-1 fees in the U.S.), under the SEC’s Share Class Selection Disclosure (SCSD) initiative.

The firms settled the charges, without admitting or denying the SEC’s findings, consented to cease-and-desist orders and agreed to disgorge the improperly disclosed fees (plus interest) to affected clients. Each firm also pledged to review and correct all their disclosure regarding mutual fund share class selection and trailer fees.

The SEC launched its SCSD effort in February 2018 to encourage firms to self-report undisclosed conflicts of interest stemming from firms and reps putting clients into fund classes that pay trailer fees when lower-cost versions of the same fund are available.

“These disclosure failures caused harm to investors, particularly retail investors, including being deprived of the ability to make informed investment decisions when purchasing higher-cost share classes,” it said.

The SEC said that the initiative was designed to incentivize firms to self-report violations, to promptly compensate investors and to review and correct their fee disclosures. In exchange for self-reporting, compensating investors and improving their disclosure, the firms did not receive any financial penalties from the regulator.

“The federal securities laws impose a fiduciary duty on investment advisers, which means they must act in their clients’ best interest,” said Stephanie Avakian, co-director of the SEC’s enforcement division. “An adviser’s failure to disclose these types of financial conflicts of interest harms retail investors by unfairly exposing them to fees that chip away at the value of their investments.”

“Most of the advisory clients harmed by the disclosure practices were retail investors, and in just a year’s time, we made tremendous headway in putting money back into their hands while significantly improving the quality of firms’ disclosures,” added Steven Peikin, co-director of enforcement at the SEC.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.