Q: What can you tell me about this SEC self-reporting initiative for registered reps who were receiving 12b-1 fees on mutual funds? Does this apply to me?

A: The SEC is offering temporary forgiveness to advisors who violated securities laws by recommending costly shares of mutual funds to their clients, when cheaper ones were available.

Under the program, called the Share Class Selection Disclosure Initiative or SCSD, the SEC has said that it will agree not to recommend financial penalties against investment advisors who self-report violations and agree to disgorge the 12b-1 fees they received.

At first blush, it seems like this would not apply to registered representatives. However, there are a significant number of registered reps who are dually registered as investment advisor representatives with a registered investment advisor, so it’s important that you understand whether or not this affects you or your employer.

SEC enforcement statistics

Over the past couple of years, the SEC’s Division of Enforcement has found what they consider to be inadequate disclosures to clients regarding the advisor’s receipt of 12b-1 fees and the conflicts of interest resulting from them. The division has pursued several enforcement actions against firms including SunTrust Investment Services, Cadaret, Grant & Co., and Credit Suisse Securities.

As a registered rep, this can affect you if you received 12b-1 fees in a brokerage account of a client who was also a client of the advisory firm. While that may seem counterintuitive (since the initiative appears directed only at advisory firms that received such fees), a straight reading of the announcement does not make it clear that the initiative is limited only to advisory “accounts.”

The announcement describes an advisory firm that could be impacted as one that “received 12b-1 fees in connection with recommending, purchasing or holding 12b-1 fee-paying share classes for its advisory clients when a lower-cost share class of the same fund was available to those clients, and failed to disclose explicitly in its Form ADV the conflicts of interest associated with the receipt of such fees.”

So even though you may have received the 12b-1 fees in the brokerage account (and not an advisory account), if the client was, nevertheless, an advisory client, the initiative may impact you.

Note that the SEC says that an investment advisor "received" 12b-1 fees if (1) it directly received the fees, (2) its supervised persons received the fees, or (3) its affiliated broker-dealer (or its registered representatives) received the fees.

A firm that should self-report but doesn’t, could face a subsequent enforcement action with the SEC going after individuals as well. If you’re dually registered as an IAR and registered rep, I would strongly recommend you discuss this with your advisory firm and experienced legal counsel.

The deadline for self-reporting is June 12, 2018, but keep in mind that once a firm does self-report, they only have 10 days to provide the commission with some very detailed information regarding the amount of fees paid and the amount a client could have paid if they’d been placed into a less expensive share class.

Alan J. Foxman

Alan J. Foxman

Alan J. Foxman is a senior consultant and vice president at NCS Regulatory Compliance, and a partner at the law firm of Dew Foxman & Haugh in Delray Beach, Florida.