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Expect More Share Class Investigations, Says SEC Enforcement Division

Bates Group Prepares Investment Adviser Firms for SEC Examinations and Provides Compliance Support
July 1, 2019
Investment of Public Funds – Pitfalls of Neglecting Periodic Review of Public Money Policies
July 10, 2019

In May 2019, we sent out an Alert warning that the SEC’s Enforcement Division had initiated investigations against firms that did not self-report by the deadline of the SEC’s Share Class Selection Disclosure Initiative. (SeeBates Alert for background on the Initiative.)

Confirmation of this new push by the SEC to likely “bring more enforcement actions against investment firms that pushed higher mutual funds with higher fees on clients who had cheaper options” was reported recently by Bloomberg Law News. The article quoted Steven Peikin, co-director of the SEC’s Division of Enforcement, warning firms of forthcoming enforcement activity. 

More than $125 million in investor money was collected by the SEC from 79 companies through disgorgement (not fines) as part of its settlement with companies that self-reported. Enforcement actions for firms that did not self-report are expected to have a “broader focus than the initiative,” focusing on “compensation that can cause conflicts of interest” including “revenue-sharing payments.”

Bates Supports Firms In Share Class Matters:

Bates Group stands ready to support firms in their Share Class-related enforcement matters. Bates has deep, proven experience and expertise in share class analysis, covering disclosures, compensation and conflicts of interest.

Recently, on behalf of over sixteen major national and regional financial institutions, Bates provided important assistance to firms and their counsel participating in the SEC’s Share Class Selection Disclosure Initiative and related SEC Examinations, as well as to firms addressing FINRA’s recent 529 Share Class Initiative. As a result, those companies have saved tens of thousands of dollars in remediation costs and avoided reputational harm.

Bates Group helps firms review their policies and procedures for share class selection, disclosures and compensation practices. We perform data analysis, identifying an appropriate methodology to narrow the focus to only adversely impacted accounts, performing calculations and providing remediation and interest figures for use with regulators.

Bates also helps firms review current supervisory and compliance practices to ensure they are properly designed to identify and mitigate these conflicts. Most importantly, after consultation with counsel, we provide reporting that can be used directly with the SEC.