SEC Investigating Investment Advisers That Did Not Self Report Under 12b-1 Initiative

Following several enforcement actions brought against registered investment advisers that received 12b-1 fees when institutional shares were available to be purchased in clients’ advisory accounts, in February of this year the Securities and Exchange Commission announced an initiative under which firms could self-report the receipt of “avoidable” 12b-1 fees since 2014.  Under the so-called Share Class Selection Disclosure Initiative (SCSDI), advisers who self-reported receiving 12b-1 fees under those circumstances would be subject to an SEC enforcement action but would receive favorable treatment in such a case. Such favorable treatment included no recommended civil penalties as long as the firm agreed to disgorge all avoidable 12b-1 fees received.

In order to participate in the SCSDI, however, firms were required to report to the SEC by June 12, 2018. In announcing the SCSDI, the SEC indicated that firms that did not self-report may be subjected to harsher sanctions if their practice was later discovered.

In recent weeks through information available through clearing firm data and public sources the SEC has identified RIAs that may have received 12b-1 fee but chose not to self-report. Some of these firms are receiving subpoenas or requests for information and testimony.  Whether the failure to report was justified and/or the original receipt of the 12b-1 fees were not improper are questions that the SEC Enforcement Staff will be evaluating during its investigations.  In some limited circumstance a firm might be able to justify receipt of the questioned fess, and also might be excused from or ineligible for the self-reporting initiative.

In enforcement actions commenced both before and after the SCSDI began, patterns emerged as to how the SEC treats certain conduct, what types of factors may mitigate or excuse the conduct, and similar questions. Further patterns emerged relating to what sanctions the SEC concludes may be justified or sustainable in an administrative proceeding.

Familiarity with the initiative, and with the SEC’s enforcement posture outside of the initiative, would be beneficial in attempting to craft an appropriate response and in guiding interactions with the Enforcement Staff. Any firm receiving such an information request should, of course, cooperate to the fullest extent possible while also seeking competent legal advice and/ or counsel.


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