With the issue of investment advisers putting their clients into higher-fee share classes when a low-cost option is available continuing to be a problem – and the subsequent Share Class Selection Disclosure Initiative developed to combat the problem on a voluntary basis – the SEC has released an FAQ to help firms answer questions they may have about self-reporting share class violations. You can read the full FAQ here.
It’s important to note that such self-disclosure will not necessarily protect a firm from enforcement or necessarily reduce or eliminate penalties. Rather, the initiative is designed to provide favorable terms when enforcement takes place. This includes allowing an adviser to neither admit nor deny the findings, and, for eligible advisers, the commission not imposing a penalty – though again, this last part is not guaranteed.
Standardized, Favorable Terms Benefit Firms Who Know They Are in Violation
The main question that each firm must ask itself is whether or not it is in violation. If it’s clear that conflicts of interest with respect to 12b-1 fees were not properly disclosed, the firm likely needs to consider taking advantage of the initiative.
That being said, many firms are wary (and rightfully so) of blindly taking advantage of the initiative, which is what inspired the SEC to create the FAQ. Many firms are not entirely sure what, specifically, makes them eligible or ineligible for this initiative and what to expect if they decide to take advantage.
With the looming deadline of June 12, 2018, every firm that might be eligible needs to read the FAQs closely and make a decision – even firms that have had this issue brought up during an OCIE exam need to self-report.
Consult With Our Quick Response Team for Regulatory Examinations, Formal Investigations, and Enforcement
If your firm is likely to take advantage of this initiative, you need a team on your side who is familiar with regulators, who understands the process, and who can help you navigate the complexities that you’re about to encounter.
Even though you plan on self-reporting, your firm still faces significant risk. Working with our Quick Response team allows you to enter this stressful situation with someone in your corner working hard to reduce penalties and fees while simultaneously looking out for the survival and longevity of your firm. Contact us to learn more.