Episode 8: Self Reporting Share Class Selection Disclosures

Special episode of the CCO Buzz this week - we talk about the SEC's recent announcement regarding self-reporting of share class selection disclosures in regards to mutual funds, and what you as a CCO need to be aware of to react to this initiative. 

Transcript: 

Jennifer:

This is the CCO Buzz, and this week, we're presenting a special edition to talk about the SEC's recent announcement regarding the Share Class Disclosure Initiative. I'm Jennifer Greene, the Marketing Strategist here at Core Compliance and Legal Services, and I'll be talking with Robert Boeche, a Senior Compliance Consultant here, to provide a high level overview of what you as a CCO need to know about this initiative. 

Robert, can you tell us a bit about the background of this initiative? 

Robert: 

Sure. This initiative is really one of proper disclosure. So where the SEC is seeing repeat violations of advisers and broker-dealers for failing to properly disclose conflicts of interest associated with mutual fund share classes and commissions thereto. 

Basically, the SEC wants to see a higher level of disclosure in this area than many people realize. A lot of firms aren't necessarily disclosing what they should about the share classes of mutual funds they're putting their clients in, or they're failing to properly customize those disclosures to accurately portray the conflicts associated therewith. 

Jennifer: 

Okay, so can you give us an example? 

Robert: 

Absolutely. Earlier this week, the SEC released an order in the matter of Ameriprise Financial Services, that really exemplifies this concept. In that order, the SEC stated that among other things, Ameriprise failed to properly disclose that they would receive more commissions based upon the mutual fund share class being purchased by the investor, and other options available.

They also failed to let investors know that these fees could negatively impact investors returns. What's also important to note here is that Ameriprise actually did have some disclosures in this area, however they simply stated that certain account types, such as retirement plan accounts, may be eligible for discounts and waivers on share classes, but they did not properly disclose to who and when such discounts would apply. 

As a result of this, Ameriprise agreed to disgorge all commissions, plus interest, on mutual fund purchases where an investor bought into a share class, but there was a lower cost option available. This totaled almost two million dollars of disgorgements, and Ameriprise agreed to a penalty of almost a quarter of a million dollars  and agreed to additional censures and cease and desist orders from the SEC. 

Jennifer: 

Ouch! Okay, so the big issue here is that many firms aren't being as direct or clear with their disclosures as the SEC may require. 

Robert: 

That's absolutely right. So, the SEC is not accepting template disclosures anymore, and the word "may" is not okay. The SEC really wants more tailored disclosures to the firm and its individuals, as to whether or not they do receive commissions, or other fees associated with the sale of mutual funds, whether cheaper mutual fund share classes are available, and how those commissions, if you are paying more, may negatively impact the returns that investors experience. 

Jennifer

Okay, so, the SEC is concerned that investment advisers have not been disclosing this, leading to potentially widespread investor harm. 

Robert: 

That's right, and that's exactly why this initiative was put in place. The SEC does want to give advisers the ability to go back and review their current disclosures in light of this guidance. And, if those advisers feel like they may have failed to properly disclose these conflicts, the SEC is giving them the ability to self-report such shortcomings. 

Jennifer: 

Looking back at the SEC's announcement, they talked about who should self-report to the division, and who shouldn't. Are you able to summarize who should be reporting? 

Robert: 

Sure. Keep in mind, this is a high level summary, and not all-inclusive, but typically the SEC is focusing on advisers who do not explicitly disclose in their applicable Form ADV disclosure brochures conflicts of interest associated with 12b-1 fees the firm may be experiencing or its affiliates or supervised persons may be receiving from investment advisory clients who invest in such mutual funds and such commissions that are paid out on those types of share classes. 

If you're unsure though as to whether or not this initiative applies to you, and whether you should possibly self report, I do encourage you to reach out to a compliance consultant or other expert to help you determine if you need to self report. 

Jennifer: 

Okay, so, what are the benefits of self reporting? 

Robert: 

Well, the SEC is really focusing on the end investor with this announcement. So, while advisers and their affiliates and/or supervised persons will be required to disgorge the commissions they may have received from higher share classes, similar to what we saw in the Ameriprise case, the SEC has said they will not be imposing additional penalties, like they did on Ameriprise and how they have threatened to do so against those advisers who do not self report. 

Jennifer: 

Ah, alright, so then what are the first steps in determining whether or not you should be self reporting? 

Robert: 

It really depends on the type of advisory structure you use, and whether registration would dictate that these conflicts of interest exist for your firm model. And then you really want to look at those disclosures you may have already made in your Form ADV or elsewhere. 

Jennifer: 

So you just mentioned Form ADV. For investment advisers whose fiscal year ended December 31st, their Form ADV annual amendments are due on March 31st, right? 

Robert: 

That's right. 

Jennifer: 

So should investment advisers who work with mutual funds be talking to a compliance consultant to determine if they need additional information in their Form ADV? 

Robert: 

Absolutely. Again, so those advisory firms who have a dual registration with a BD or who has advisers who are also registered representatives of a broker dealer, this is going to be important, especially if your investment strategy calls for investment in mutual funds. It's very common for funds to have different share classes, and so it can become a matter of proper disclosure. 

Jennifer: 

Awesome. Thank you Robert, if anybody listening has any further questions, they can give us a call at area code 619 278 0020, or email us at info@corecls.com. Thank you. 

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