SEC Orders Three Self-Reporting Advisory Firms to Reimburse Investors

The Securities and Exchange Commission today announced settled charges against two advisers that self-reported as part of the Division of Enforcement’s Share Class Selection Disclosure Initiative, and a third adviser that self-reported within months of the initiative’s self-reporting deadline.  The Commission’s orders today are the final cases the Division intends to recommend under the terms of the initiative.  Including today’s actions, the Commission has ordered more than $139 million to be returned to investors as part of the initiative.

The voluntary initiative announced by the Division of Enforcement on February 12, 2018, provided advisers an opportunity to self-report that they had failed to fully and fairly disclose their conflicts of interests in selecting for their advisory clients more expensive mutual fund share classes that paid 12b-1 fees when lower-cost share classes were available for the clients and be eligible for standard settlement terms that did not include the imposition of a civil penalty.  From March 11, 2019 through September 30, 2019, the Commission issued orders against 95 advisers that chose to participate in the initiative. 

“This incredibly successful initiative led to the return of almost $140 million to harmed investors, stopped wrongful conduct, and highlighted the importance of an adviser’s obligations to provide full and fair disclosures to clients,” said C. Dabney O’Riordan, Co-Chief of the Asset Management Unit.  “We continue to actively pursue disclosure failures that financially benefit the adviser to the detriment of the client.”

The SEC’s orders find that Merrill Lynch, Pierce, Fenner & Smith Incorporated and Eagle Strategies LLC violated Section 206(2) of the Investment Advisers Act of 1940, and ordered that they are censured, that they cease and desist from future violations, that they pay disgorgement and prejudgment interest totaling over $425,000 and that they comply with certain undertakings, including returning the money to investors.

The SEC also charged Cozad Asset Management Inc., which self-reported its share class selection violations to the Commission in the months following the initiative deadline.  The SEC found that Cozad failed to fully disclose the conflicts arising from its and its associated persons’ selection of more expensive mutual fund share classes for clients when lower-cost share classes for the same fund were available.  The SEC’s order finds that Cozad violated Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder, and ordered that it is censured, that it cease-and-desist from future violations, that it pay disgorgement and prejudgment interest totaling over $400,000, as well as a $10,000 civil penalty, and that it comply with certain undertakings, including returning the money to investors.

Since September 2019, the Commission has issued orders against two firms that were eligible to self report pursuant to the initiative, but failed to do so.  See Mid Atlantic Financial Management Inc. (ordered to pay $1,027,002 in disgorgement and prejudgment interest and a $300,000 civil penalty) and BPU Investment Management Inc. (ordered to pay $692,107 in disgorgement and prejudgment interest and a $235,000 civil penalty). 

The Share Class Selection Disclosure Initiative was led by the Division of Enforcement’s Asset Management Unit. The initiative settlements announced today were coordinated by SEC attorneys Ronnie Lasky, Donna Norman, Corey Schuster, Janene Smith, and John Farinacci, an industry expert in the Asset Management Unit.

The SEC’s investigation of Cozad was conducted by SEC attorney David Benson of the Asset Management Unit.