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Disclosure failures cost 17 advisory firms $10.3 million

The Securities and Exchange Commission (SEC) has ordered 17 investment advisers to pay more than $10 million to settle charges of disclosure failures regarding their mutual fund share class selection practices. The firms include 16 advisers that self-reported as part of the Division of Enforcement’s Share Class Selection Disclosure Initiative and one adviser that did not self-report and was ordered to pay a $300,000 civil penalty.

SEC delivers standardized settlements for self-reporting advisers

As part of the initiative announced on Feb. 12, 2018, the SEC’s Division of Enforcement agreed to recommend standardized settlement terms and no civil penalties for eligible firms that self-reported negligent activities by the reporting deadline. On March 11, 2019, the Commission instituted actions against 79 advisers that participated in the initiative, ordering the payment of over $125 million in disgorgement and prejudgment interest to investors. 

The Commission closed out the month of September with orders against 16 additional advisers that self-reported as part of the initiative, bringing the total amount ordered to be returned to investors to over $135 million.

A 17th advisory firm, which was eligible to self-report but did not, Mid Atlantic Financial Management Inc., was not so lucky. The Commission found that Mid Atlantic, whose affiliate received 12b-1 fees, failed to fully disclose the conflicts arising from its selection of more expensive mutual fund share classes for clients when lower-cost share classes for the same fund were available. Because it failed to self-report, the SEC ordered Mid Atlantic to pay over $1 million in disgorgement and prejudgment interest. And, unlike the firms that self-reported Mid Atlantic was ordered to pay a $300,000 civil monetary penalty.

The SEC reaffirms the benefit to advisers and their clients for self-reporting, said C. Dabney O’Riordan, Co-Chief of the Asset Management Unit. We are committed “to holding advisers accountable for selecting more expensive investments that eat away at their clients’ investment returns without proper disclosure.”

SEC hits non-self-reporting firm with nearly $1.3 million

The SEC censured the 16 advisory firms and ordered them to pay disgorgement and prejudgment interest totaling nearly $10 million and that among their assignments, was returning the money to investors. Mid Atlantic also was censured, and ordered to pay disgorgement and prejudgment interest totaling over $1 million and a $300,000 civil penalty, and that among other assignments, it, too, return money to investors.

SEC names self-reporting firms charged.

Self-reporting does not preclude public naming. The SEC named the following firms in this initiative:

  1. Bill Few Associates Inc.
  2. Cargile Investment Management Inc.
  3. Comprehensive Capital Management Inc.
  4. Equity Services Inc.
  5. Essex Financial Services Inc.
  6. Folger Nolan Fleming Douglas Capital Management Inc.
  7. Henley & Company Wealth Management LLC
  8. Hilltop Securities Inc. and Hilltop Securities Independent Network Inc.
  9. IC Advisory Services Inc.
  10. Independent Financial Group LLC
  11. Investment Partners Ltd.
  12. IPG Investment Advisors LLC
  13. Michigan Advisors Inc.
  14. Saxony Capital Management LLC

Self-reporting is helpful, but pre-empting exposures is better That’s where Patrina comes in. For more than 25 years, Patrina has been helping compliance professionals like you keep track of “bad apples,” and stay on the “straight and narrow” efficiently and cost-effectively. So, let’s talk. Call 212-233-1155 to ask about Patrina’s cost-effective, designated third-party services, our comprehensive 8-module compliance solution, and compliant data capture & file storage, and records archiving specifically designed for the financial services community. Be smart. Be covered. Let’s talk.

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