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SEC launches initiative to remove clients from pricey mutual fund share classes

The Securities and Exchange Commission has launched a self-reporting initiative for investment advisers who placed customers into more expensive share classes that may compensate the advisers more.

Under the Share Class Selection Disclosure Initiative, the enforcement division will recommend standardized, favorable settlement terms to investment advisers that self-report that they failed to disclose conflicts of interest associated with the receipt of 12b-1 fees by the adviser, its affiliates or its supervised persons for investing advisory clients in a 12b-1 fee paying share class when a lower-cost share class of the same mutual fund was available for clients.

For eligible advisers that participate in the initiative, the division will recommend settlements that will require the adviser to disgorge ill-gotten gains and pay those amounts to harmed clients, but the regulator will not impose a civil monetary penalty. The division warned that it expects to recommend stronger sanctions in any future actions against investment advisers that do not join the initiative.

"We strongly encourage advisers to take advantage of the favorable terms we are offering; these terms will not be available to advisers who do not self-report under this initiative," Steven Peikin, co-director of the Division of Enforcement, said in a statement.

Investment advisers have until June 12 to declare their intention to join the initiative.