SEC Investigating Investment Advisers Whose Supervised Persons Received 12b-1 Fees on Advisory Accounts

If your investment adviser permitted its supervised persons to receive rule 12b-1 fees through an unaffiliated broker-dealer at any point in the last five years, you should start preparing for an examination by the SEC’s Office of Compliance Inspections and Examinations or an inquiry from its Division of Enforcement. (I recently covered the one of the first enforcement cases where the SEC settled with such an adviser). The SEC rarely brings enforcement cases in isolation these days, and you can safely assume there will be more of these investigations and enforcement actions to follow.

There are a number of hybrid investment advisers associated with independent broker-dealers where this practice may have been prevalent. The recent settled enforcement action involved an investment adviser and its supervised persons that were registered representatives of Triad Advisers, Inc.

If your firm has supervised persons that received rule 12b-1 fees from advisory accounts at any point (but particularly from September 2015 through the present), you should be considering the following:

  1. What is our firm’s exposure? How much money is potentially at issue?
  2. What did our firm disclose to clients regarding these practices?
  3. How many representatives and which representatives were involved in this practice? Was it owners or management at the firm?
  4. Has the disclosure and/or the receipt of rule 12b-1 fees been corrected on a go-forward basis? Did we disgorge all of the rule 12b-1 fees?
  5. If our firm’s disclosures were inadequate (which they likely were in the eyes of the SEC Staff), have we voluntarily and proactively disgorged these fees? If not, why not? If so, did we include an interest component?

I have been assisting investment advisers for the better part of the last six years on issues involving share class selection and disclosure. I have been deeply involved representing clients’ interest in some of the earliest enforcement actions involving these matters, and have assisted clients successfully avoid enforcement actions altogether. If your firm (i) is trying to assess its risks, (ii) contemplating how to minimize its exposure, or (ii) is seeking counsel or a second opinion on whether its practices or disclosures were or currently are sufficient, please feel free to contact me.

Leave a Reply