Many Hybrid RIAs Are Hiding 12b-1 Fees

Investment advisors, and particularly hybrid RIAs, are still attempting to conceal mutual fund share class violations—specifically 12b-1 charges—that result in higher investor costs, the Securities and Exchange Commission said in its recently released 2018 enforcement report.

While “scores” of investment advisors and brokers participated in the SEC’s voluntary program allowing advisors to self-report the fact that they sold investors more expensive mutual fund shares and received higher fees as a result, many advisors ignored the program, according to the SEC’s report. The voluntary disclosure program, which will result in charges and investor restitution against advisors who self-reported, ended June 12.

The commission has also brought more than 15 enforcement cases against advisors for share class disclosure failures and has continued to make such disclosure a priority in its exams and public statements.

“But despite these efforts, disclosure failures persist,” the SEC said.

The Enforcement Division had close to a dozen ongoing investigations relating to failure to disclose 12b-1 charges and share class violations back in February, the report said.

Advisors still not in compliance who haven’t been contacted by the agency should not take regulators’ silence as a sign they have escaped detection and enforcement. On average, share class violation investigations take nearly two years to complete, the SEC said.

It is thought that many of the violations involve hybrid RIAs that started out with a commission and trail fee structure and have been converting their business to a fee-based or fee-only format. In the process, many accounts remain in an undefined status.

Those advisors caught up in violations, now that the voluntary self-reporting deadline has passed, are subject to antifraud charges, an agreement to pay disgorgement to harmed investors and a penalty. Penalties are generally not being sought against advisors who self-reported, the SEC said.

The SEC’s focus on share class enforcement has two goals: (1) ensuring that these conflicts are adequately disclosed to investors; and (2) getting money back into the pockets of investors as quickly and efficiently as possible.