The U.S. Securities and Exchange Commission (SEC) on Tuesday announced a new program that allows investment advisory firms to self-report undisclosed conflicts and return money to harmed investors, in exchange for a pass on enforcement action against them.
The SEC’s enforcement division is adopting the self-reporting initiative that will see the division agree to not pursue financial penalties against investment advisors who self-report violations involving a failure to disclose conflicts involving putting clients into cheaper mutual fund share classes. To qualify, firms must also promptly return money to harmed clients.
Under U.S. securities laws, investment advisors have a fiduciary duty to act in their clients’ best interests, including a duty to disclose all conflicts of interest. “Investment advisors must be mindful of their duties when recommending and selecting share classes for their clients and disclose their conflicts of interest,” the SEC says in a news release.
In recent years, the SEC has brought charges against nine firms for failing to disclose these sorts of conflicts, and, these actions have resulted in significant penalties against the firms, in addition to millions of dollars in restitution to clients.
The U.S. regulator will pursue stronger sanctions in future enforcement actions against investment advisors that engage in the misconduct but failed to take advantage of this initiative.
“This focused initiative reflects our effort to allocate our resources in a way that effectively targets the continued failure by some advisors to disclose conflicts of interest around share class selection and, importantly, is intended to facilitate the prompt return of money to victimized investors,” says Stephanie Avakian, co-director of the SEC’s enforcement division, in a statement.
“The legal and regulatory requirements in this area are clear, and the commission will continue to pursue securities violations associated with mutual fund share class selection disclosure failures. We strongly encourage advisors to take advantage of the favourable terms we are offering; these terms will not be available to advisors who do not self-report under this initiative, and we will continue to proactively seek to identify and pursue investment advisors that fail to make the necessary disclosures,” adds Steven Peikin, co-director of enforcement, in a statement.