The Securities and Exchange Commission (SEC) has offered advisors the chance to come clean and avoid fines for having put clients in more expensive share classes.
Under a new program called the Share Class Selection Disclosure initiative (SCSD initiative), the agency said it would not recommend financial penalties against advisors who self-report their violations of the fiduciary standard and return money to affected clients.
The SEC highlighted that Section 206 of the Investment Advisers Act of 1940 imposed a fiduciary duty on investment advisors to act in their clients' best interests, including an affirmative duty to disclose all conflicts of interest, such as payment they may receive for placing clients in more expensive mutual fund share classes.
However, in the past several years, the agency has charged nine firms that fail to disclose their selection of a more expensive mutual fund share class for a client when a less expensive share class for the same fund is available and appropriate.
It said it would 'agree not to recommend financial penalties against investment advisors who self-report violations of the federal securities laws relating to certain mutual fund share class selection issues and promptly return money to harmed client.'
The SEC said that it would recommend harsher punishments against advisors who engage in such misconduct but fail to take advantage of this new program.
The agency said advisors must notify SEC’s enforcement division of their intent to self-report no later than June 12.
‘We strongly encourage advisors to take advantage of the favorable terms we are offering; these terms will not be available to advisers who do not self-report under this initiative, and we will continue to proactively seek to identify and pursue investment advisers that fail to make the necessary disclosures,’ said Steven Peikin, co-director of the division of enforcement.