The US Securities and Exchange Commission has ordered many firms to pay penalties for not giving investors the right information when helping them select mutual fund share classes. This is part of a successful long-term campaign.

The firms are Mid Atlantic Financial Management, Bill Few Associates, Cargile Investment Management, Comprehensive Capital Management, Equity Services, Essex Financial Services, Folger Nolan Fleming Douglas Capital Management, Henley & Company Wealth Management, Hilltop Securities, Hilltop Securities Independent Network, IC Advisory Services, Independent Financial Group, Investment Partners, IPG Investment Advisors, Michigan Advisors, Saxony Capital Management and Wedbush Securities. All firms except the first one confessed their transgressions to the SEC spontaneously and therefore benefited from more merciful terms.

The SEC has chastised the firms for flouting their fiduciary duties and not disclosing enough information in connection with (i) "mutual fund share class selection practices" and (ii) the fees that they received in line with Rule 12b-1, which the regulator issued long ago in accordance with the Investment Company Act 1940. Section 206(2) Investment Advisors Act gives every investment adviser a fiduciary duty to tell his/its clients all conflicts of interest which might incline him/it (consciously or unconsciously) to render advice that is not disinterested.

This was problematic because, at times over the last few years, the firms purchased, recommended, or held for advisory clients mutual fund share classes that charged 12b-1 fees instead of cheaper share classes of the same funds for which the clients were eligible. They should have done so on Form ADV, a required submission that every investment advisor should make to the SEC (and regulators in the states) which stipulates the firm's investment style, assets under management (AuM) and key officers. Every firm that manages in excess of $25 million must update its Form ADV annually and made it a matter of public record.

Mutual funds typically offer investors different share classes. Each class represents an interest in the same portfolio of securities with the same investment objective. The primary difference among the share classes is the fee structure – for example, some mutual fund share classes charge recurring 12b-1 fees (typically 0.0025% to 0.01%) to cover fund distribution and sometimes to cover shareholder service expenses.

These sins are common. To cope with them, the SEC embarked on its so-called "share class selection disclosure initiative" in February last year. This is a promise of leniency in return for spontaneous confessions of wrongdoing. A fine crop of firms have sent in their confessions this year – in March the SEC announced settled charges against 79 investment advisors who had promised to return more than $125 million to clients – in exchange for the SEC not levying punitive charges on top of their compensation to the clients they had harmed, plus other charges such as disgorgement (the handing over of ill-gotten profits) and prejudgment interest to investors.