SEC Enforcement Division Provides Additional Clarification for SCSD Initiative

The Securities and Exchange Commission’s Share Class Selection Disclosure (SCSD) Initiative, announced on February 12, seeks to protect advisory clients from, and return money to, those affected by undisclosed conflicts of interest.

Under the SCSD Initiative, the SEC’s Enforcement Division will recommend standardized, favorable settlement terms to investment advisers who self-report that they failed to disclose conflicts of interest associated with the receipt of 12b-1 fees by the adviser, its affiliates, or its supervised persons for investing advisory clients in a 12b-1 fee paying share class when a lower-cost share class of the same mutual fund was available for the advisory clients.  In those cases, the Enforcement Division will recommend settlements that do not impose a civil monetary penalty while requiring participating advisers to return ill-gotten gains to harmed advisory clients.

On May 1, the SEC further clarified the SCSD Initiative through issuance of frequently asked questions (FAQs); providing additional information regarding adviser eligibility, lowest share class available, disgorgement, setoffs and the distribution of funds to clients.

According to Capital Forensics Managing Director John Ivan, “These FAQs will help investment advisers to evaluate the SEC’s expectations with respect to self-reporting and returning money to clients, and if appropriate, to determine what steps should be taken.”

Mr. Ivan also noted that Capital Forensics is currently assisting clients and their legal counsel with issues related to data analytics issues, that are required to properly assess and complete the SCSD.

For additional information, refer to CFI’s recently published article on the SCSD Initiative in the March 2018 issue of Currents, the flagship publication of the National Society of Compliance Professionals: https://www.capitalforensics.com/2018/04/03/cfi-provides-guidance-on-sec-share-class-selection-disclosure-scsd. For additional guidance, contact John Ivan directly at john.ivan@capitalforensics.com.