The SEC has yet to release results of the voluntary share class settlement, but said the SEC’s office of compliance is still very much involved in making enforcement referrals in the area.
Kahl also told audience members that the agency is unlikely to go lightly on firms that opted not to make voluntary disclosures, and it’s more likely it would make enforcement referrals in its efforts to cleanse firms of higher priced share classes.
Douglas Scheidt, the former associate director and chief counsel in the SEC Division of Investment Management, said he has no doubt that firms have spent sleepless nights deciding whether to self-report their share class violations to the agency.
“If I were working with a firm, I’d say first of all, ‘Clean up your shop, make clients whole and weigh the differences between laying down and getting a sure enforcement action, or if the SEC finds you’ve taken care of clients the [agency] may just move on,’” Scheidt said.
Compliance consultants at the conference said the SEC is sending out letters even to those firms whose clients came in the door already holding legacy positions in higher-priced share classes. Sometimes, clients may not want to sell their higher-priced shares because of the taxes the sales would trigger.
“These firms are getting the same hammer, when they’re not getting any of the benefits and didn’t sell the investment in the first place,” one consultant said.
Still, if those advisors dealing with legacy investments are nonetheless putting more client dollars into those same shares during normal quarterly reallocations, they will have a problem, said Jennifer Suellentrop, vice president and associate general counsel at Fidelity Investments.
In these cases, at the very least “make sure you provide disclosure that explains the various options and costs and get client consent,” Scheidt said.
Kahl said mutual fund break points—discounts that advisory firms negotiate with fund companies—also continue to be a red flag for examiners.
In the end, advisors should not only be educating clients about the fees and choices they have; they should be able to explain clearly why they’re putting investors into wrap fee programs, which charge advisory fees instead of commissions.