Sixteen firms self-reported undisclosed conflicts of interest about the kinds of mutual funds they sell to the Securities and Exchange Commission in order to avoid additional civil penalties, the SEC announced today, though the firms will collectively repay affected clients nearly $10 million. The commission also levied an additional civil penalty on a firm that failed to self-report such conflicts, despite being eligible to do so.
The fines were the latest in the commission's Share Class Selection Disclosure Initiative, which was announced in 2018 and offered firms with undisclosed conflicts of interest pertaining to their selection of mutual fund share classes to self-report these discrepancies to the SEC to avoid additional penalties. Firms need to self-report by June 12, 2018, and in March of this year, the SEC demanded that 79 corporate registered investment advisor firms repay investors more than $125 million in total. The 16 firms cited today include Equity Services, Hilltop Securities, IC Advisory Services and Saxony Capital Management (the full list of firms is available on the SEC’s site).
“Today’s actions reaffirm the benefits to advisers and their clients for self-reporting as part of the Initiative,” SEC Asset Management Unit Co-Chief C. Dabney O’Riordan said. “They also demonstrate the Commission’s commitment to holding advisers accountable for selecting more expensive investments that eat away at their clients’ investment returns without proper disclosure.”
However, the SEC did choose to impose a civil penalty on Mid Atlantic Financial Management. Between October 2013 and April 2018, advisors at Mid Atlantic recommended and purchased higher-cost share class mutual funds when lower-cost alternatives of the same funds were available to clients, according to the SEC order (the different share class meant greater revenue for the advisors). However, Mid Atlantic Financial Management allegedly failed to note the conflict on the firm's Form ADVs submitted to the SEC. The SEC demanded Mid Atlantic pay more than $1 million in restitution for affected clients, along with a $300,000 fine payable to the commission because it did not self-report its conflicts.
Last Friday, the SEC fined two BMO financial services firms $37 million for failing to disclose to clients and the SEC that they were placing half of their clients’ assets in higher cost share class proprietary mutual funds. Additionally, in late August the SEC charged Cetera Advisors with failing to disclose conflicts about its mutual fund investment strategies; particularly, the SEC complaint asserted that Cetera “continuously recommended and invested client assets in investments that cost clients more when less expensive, identical investments were available.”