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SEC Settles with 79 Investment Firms for Mutual Fund Sales, Firms Returning $125 Million to Investors

The Securities and Exchange Commission has settled charges against 79 investment advisers that will return more than $125 million to clients, with a substantial majority of the funds going to retail investors.

The Securities and Exchange Commission has settled charges against 79 investment advisers that will return more than $125 million to clients, with a substantial majority of the funds going to retail investors.

The actions stem from the SEC’s share class selection disclosure initiative, which the SEC’s division of enforcement announced in February 2018 in an effort to identify and correct what it deems as ongoing harm in the sale of mutual fund shares by investment advisers.

The initiative incentivized investment advisers to self-report violations of the Advisers Act resulting from undisclosed conflicts of interest, promptly compensate investors, and review and correct fee disclosures. The orders address advisers who directly or indirectly received 12b-1 fees for investments selected for their clients without adequate disclosure, including disclosures that were inconsistent with the advisers’ actual practices.

The SEC’s orders found that the 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.

Specifically, the SEC’s orders found that the settling investment advisers placed their clients in mutual fund share classes that charged 12b-1 fees – which are recurring fees deducted from the fund’s assets – when lower-cost share classes of the same fund were available to their clients without adequately disclosing that the higher cost share class would be selected.

According to the SEC’s orders, 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, creating a conflict of interest with their clients, as the investment advisers stood to benefit from the clients’ paying higher fees.

In February 2018, the SEC’s division of enforcement announced the creation of the share class selection disclosure initiative to address concerns that investment advisers were not adequately disclosing conflicts of interest related to their mutual fund share class selection practices.

The initiative allowed investment advisory firms to avoid financial penalties if they timely self-reported undisclosed conflicts of interest, agreed to compensate harmed clients, and undertook to review and correct their relevant disclosure documents.

“Investment advisers play a vital and trusted role in our markets…Regardless of the scope and duration of the investment advisory services, investment advisers are fiduciaries and, as such, their duties of care and loyalty require them to disclose their conflicts of interest, including financial incentives,” said SEC Chairman Jay Clayton. “I am pleased that so many investment advisers chose to participate in this initiative and, more importantly, that their clients will be reimbursed. This initiative will have immediate and lasting benefits for Main Street investors, including through improved disclosure.”

There were 79 firms that settled with the SEC without admitting or denying the findings, including AXA Advisors LLC, Deutsche Bank Securities Inc., Investacorp Advisory Services Inc., Kestra Advisory Services LLC, Kestra Private Wealth Services LLC, LPL Financial LLC, Next Financial Group Inc., Oppenheimer & Co. Inc., Raymond James Financial Services Advisors, Robert W. Baird & Co. Incorporated, Stifel, Nicolaus & Company, TIAA-CREF Individual & Institutional Services LLC, Transamerica Financial Advisors Inc., Wells Fargo Advisors Financial Network LLC, and Woodbury Financial Services Inc., among others.

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