Dual Registrant Will Pay Over $900,000 for Inadequate Mutual Fund Revenue Sharing Disclosure
A dual registrant agreed to pay over $900,000 to settle charges that it breached its fiduciary duty by collecting 12b-1 fees on recommended mutual fund share classes when lower expense share classes were available. The SEC found inadequate the firm’s disclosure that it received 12b-1 fees because the firm failed to provide “full and fair disclosure that is sufficiently specific so that [the clients] could understand the conflicts of interest… and could have an informed basis on which they could consent or reject the conflicts.” The respondent failed to self-report to the SEC pursuant to the Share Class Disclosure Initiative, which could have avoided penalties. The SEC also charges the firm, whose principal serves as Chief Compliance Officer, with failing to implement reasonable compliance policies and procedures.
Revenue sharing is dead. We don’t think an adviser could include enough disclosure to satisfy the SEC where the adviser recommends a share class more expensive that a comparable share class that does not result in adviser payola. Also, this case is another example of the failed dual-hat Chief Compliance Officer model.