The initiative, which the SEC’s Division of Enforcement announced in February 2018, encourages investment advisers to self-report violations of the Investment Advisers Act, such as undisclosed conflicts of interest. As an incentive to get advisors to self report, the Division of Enforcement agreed to recommend that the SEC accept favorable settlement terms for them.
Among the firms charged are Deutsche Bank Securities, BB&T Securities, Oppenheimer & Co., Raymond James Financial Services Advisors, RBC Capital Markets, Santander Securities, TIAA-CREF Individual & Institutional Services,
Transamerica Financial Advisors, Wells Fargo Clearing Services, and Wells Fargo Advisors Financial Network.
According to the SEC’s complaints, the 79 investment advisers failed to adequately disclose conflicts of interest related to the sale of higher-cost mutual fund share classes when a lower-cost share class was available.
“The federal securities laws impose a fiduciary duty on investment advisers, which means they must act in their clients’ best interest,” Stephanie Avakian, co-director of the SEC’s Division of Enforcement, said in a release. “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.”
The SEC said that the investment advisers placed their clients in mutual fund share classes that charged recurring 12b-1 fees deducted from the fund’s assets, without disclosing that lower-cost share classes of the same fund were available.
According to the SEC, the 12b-1 fees were routinely paid to the investment advisers in their capacity as brokers, to their broker-dealer affiliates, or to their personnel who were also registered representatives. The regulator said that this created a conflict of interest as the advisers stood to benefit from clients paying higher fees.
Without admitting or denying the findings, each of the settling investment advisers consented to cease-and-desist orders finding violations of Section 206(2) and, except with respect to state-registered-only advisers, Section 207.
The firms also agreed to a censure and to disgorge the improperly disclosed fees and distribute the money with prejudgment interest to affected advisory clients. Under the agreement, each adviser will review and correct all relevant disclosure documents concerning mutual fund share class selection and 12b-1 fees, and evaluate whether existing clients should be moved to an available lower-cost share class and move clients. The SEC agreed not to impose penalties against the investment advisers in light of the terms of the initiative.