The Securities and Exchange Commission (SEC) has settled charges against several firms that self-reported as part of the division of enforcement’s share class selection disclosure initiative.
The SEC’s orders find that two advice firms Merrill Lynch, Pierce, Fenner & Smith Incorporated and Eagle Strategies violated Section 206(2) of the Investment Advisers Act of 1940.
It ordered “they are censured, that they cease and desist from future violations”, also they have been told to pay disgorgement and prejudgment interest totalling over $425,000 (£341,972, €391,495) and that they comply with conditions, including returning the money to investors.
Share class violations
The US regulator has also charged Cozad Asset Management, which self-reported its share class selection violations to the Commission in the months following the initiative deadline.
The SEC found that Cozad failed to “fully disclose the conflicts arising from its and its associated persons’ selection of more expensive mutual fund share classes for clients when lower-cost share classes for the same fund were available”.
It said that Cozad violated Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-7, and ordered that “it is censured, that it cease-and-desist from future violations”, also it has to pay disgorgement and prejudgment interest totalling over $400,000, as well as a $10,000 civil penalty.
The firm also needs to comply with conditions, including returning the money to investors.
These SEC’s orders are the final cases the division intends to recommend under the terms of the initiative.
Payback
The voluntary initiative announced by the division of enforcement in 2018 provided advisers an opportunity to self-report that they had failed to fully and fairly disclose their conflicts of interests.
These would be the selecting more expensive mutual fund share classes for advisory clients that paid higher fees when lower-cost share classes were available for them.
They would be eligible for standard settlement terms that did not include the imposition of a civil penalty.
Including these actions, the commission has ordered more than $139m to be returned to investors as part of the initiative.
“This incredibly successful initiative led to the return of almost $140m to harmed investors, stopped wrongful conduct, and highlighted the importance of an adviser’s obligations to provide full and fair disclosures to clients,” said Dabney O’Riordan, co-chief of the asset management unit.
“We continue to actively pursue disclosure failures that financially benefit the adviser to the detriment of the client.”
