Unscrupulous fiduciaries have until June 12 to turn themselves in

The Securities and Exchange Commission does not anticipate extending a June 12 deadline for registered investment advisors to report imprudent recommendations on mutual fund share classes, according to an FAQ released by the agency.

The Share Class Selection Disclosure Initiative, a program launched in February, intends to rein in “potential widespread violations” of the Investment Advisers Act of 1940.

Specifically, the program is targeting advisors’ failure to disclose 12b-1 fees on mutual funds, and recommendations of higher cost share classes when lower-cost shares of the same fund were available.

The SEC’s Division of Enforcement will recommend that firms self-reporting violations will not be subject to civil penalties. Firms will, however, be responsible for returning ill-gotten gains from 12b-1 fees on higher-cost share classes to investors, according to the announcement of the program in February.

In the newly released FAQ, the SEC offers a “non-exhaustive” list of circumstances where lower-cost share classes are available for the same fund.

The availability of a lower-cost share class is fund-specific, the FAQ says. A failure to compare share class offerings between different fund families will not be a reportable offense.

Firms that put investors into a more expensive share class when they met required minimums for lower-cost share classes will be considered in violation of the Advisers Act.

Recommendations of higher-cost share classes will be in violation if fund prospectuses included waivers of investment minimums.

Advisors who assumed funds would not waive investment minimums on lower-cost share classes without confirming their assumptions will also have to return cash to investors.

And advisors who put some investors into lower-cost share classes, and other clients of similar net worth into higher-cost classes will also be required to return money.

The SCSD Initiative will only be available to recommendations made by registered advisory firms. Recommendations made by the broker-dealer component of dually registered firms will not apply, according to the SEC.

Firms that have already been examined by SEC’s Office of Compliance Inspections and Examinations will still have to self-report violations in order to get relief from civil penalties.

Advisors will be able to explain why costlier share classes were recommended. Advisors who used 12b-1 fees to reduce a client’s annual fees may not be required to return money to investors. But advisors will not be able to claim that clients would have had to pay higher annual fees on their assets in lieu of 12b-1 fees. “The Division’s recommendation will depend on the particular facts and circumstances,” the FAQ says.

Under the SCDC Initiative, individuals associated with self-reporting firms may still be subject to further enforcement action if they violated securities laws.

For firms that are eligible for the Initiative, but choose not to self-disclose violations, the SEC cautions that subsequent enforcement action may be harsher.

“Eligible advisers are cautioned that staff from the Commission’s Office of Compliance Inspections and Examinations and the Division of Enforcement plan to continue to make mutual fund share class selection practices a priority, and plan to proactively seek to identify investment advisers that may have failed to make the necessary disclosures related to mutual fund share class selection,” the SEC said in its announcement of the program.

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