Earlier this year, the SEC staff announced their Share Class Disclosure Initiative, aimed at encouraging registered investment adviser firms to self-report violations of the Advisers Act where they did not properly, and explicitly, disclose on their Form ADV the conflicts of interest that were associated with the receipt of 12b-1 fees by the firm or its affiliates, or its supervised persons, in connection with advisory clients being invested in a fund that paid 12b-1 fees when a lower cost share class was available for the same fund. For eligible advisers, the SEC staff has announced that if they meet the requirements of this initiative and the staff decides to recommend enforcement action against the adviser, the staff will recommend a settlement that includes various terms such a a cease and desist order, censure, disgorgement of ill-gotten gains (with interest), and certain undertakings. However, the staff would not recommend a civil penalty being imposed against that adviser.
To the extent that the adviser is subject to an action that does not call for a civil penalty, leads some to call this an amnesty type of initiative. But, let’s be clear: the self-reporting adviser that becomes subject to an enforcement action will certainly have other types of sanctions imposed, even though there may not be a separate fine imposed as a civil penalty.
For RIA firms, time is ticking away on submitting a self-report of these possible violations to the SEC staff. According to the staff’s notice, for an adviser to be eligible, the firm must self-report by no later than 12:00am EST on June 12, 2018. Then, within ten business days from the notification, additional details must be submitted to the SEC staff about its business activities relating to the share class selection and disclosures, and the 12b-1 fees, among other things.
We are encouraging firms evaluating their options with respect to this initiative to get counsel involved as soon as possible to review the matter and discuss whether the firm is eligible to self-report under the initiative, and if so, whether it makes sense to do so. Additionally, the review of the business concerns may also identify other areas to be addressed.
If your firm desires more information about the initiative and their eligibility and options, contact attorney Joel Beck at The Beck Law Firm, LLC.