SEC Scrutiny of Share Class Selection Practices Intensifies

By Lauren Jackson, John I. Sanders, and Ali Fenno

Last February, the Division of Enforcement of the SEC (the “Division”) launched the Share Class Selection Disclosure Initiative (the “Initiative”). The Initiative enabled registered investment advisers (“RIAs”) to self-report their failure to disclose certain mutual fund share class selection practices as conflicts of interest on their Form ADVs.[1] In return, the Division would recommend that the SEC accept a settlement with the self‑reporting RIA that, among other things, would not include the imposition of civil penalties.[2] For a variety of reasons, many RIAs elected not to self-report (“Non-reporting RIAs”) before the Initiative ended on June 12, 2018.[3] The Division has stated that it will continue to make mutual fund share class selection practices a priority.[4] It has also stated that Non-reporting RIAs that should have self-reported could be subject to greater penalties, including fines, than those incurred by RIAs that self-reported in the Initiative.[5] Based on these statements and conversations with people within the industry, we understand that the SEC is in the process of launching an enforcement sweep. Non-reporting RIAs that believe, or are unsure of whether, they should have self-reported in the Initiative should consider obtaining legal assistance as soon as possible and, in any event, before responding to a regulator. These questions may arise in the context of a sweep letter, a subpoena or an examination request.[6] If you have any questions about the Division’s interest in mutual class selection practices, or in the regulation of RIAs generally, please feel free to contact us. Lauren Jackson is counsel and John I. Sanders and Ali Fenno are associates based in the firm’s Winston-Salem office. [1] Specifically, the Division is concerned with RIAs that have “select[ed] a more expensive mutual fund share class for a client when a less expensive share class for the same fund is available and appropriate,” e.g., where the advisor receives 12b-1 fees from one class but not from another. SEC Launches Share Class Selection Disclosure Initiative to Encourage Self-Reporting and the Prompt Return of Funds to Investors, SEC (February 12, 2018), [2] Share Class Selection Disclosure Initiative, SEC Division of Enforcement (Feb. 9, 2018), [3] Id. [4] Id. [5] Id. [6] 2018 National Exam Program Examination Priorities, SEC (Feb. 7, 2018), (Including share class selection and best execution among the SEC Office of Compliance Inspections and Examination’s examination priorities for the fiscal year).

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