The US Securities and Exchange Commission has settled charges against Merrill Lynch Pierce Fenner & Smith and Eagle Strategies, two wealth management firms that confessed to having failed to apprise their advisory clients of their conflicts of interest to the appropriate degree. In doing so, it has brought a successful campaign to persuade firms to divulge such wrongdoing to a close.

The advisors received relatively light punishments as a reward for their willingness to 'come clean' as part of the SEC’s ponderously-named Share Class Selection Disclosure Initiative. A third advisory firm also 'came clean' but months after a deadline that the SEC set. The commission’s orders are the final cases that it intends to recommend under the terms of the initiative. All told, the SEC has ordered more than US$139 million to be returned to investors as part of the scheme.

The voluntary programme began in February 2018. The SEC asked advisors to tell it if they had "failed to fully and fairly disclose their conflicts of interests in selecting for their advisory clients more expensive mutual fund share classes that paid 12b-1 fees when lower-cost share classes were available for the clients and be eligible for standard settlement terms that did not include the imposition of a civil penalty." Between 11 March and 30 September 2019, the commission issued orders against 95 advisors that chose to join in the game.

The SEC’s orders – made in the SEC's own private court – say that Merrill Lynch Pierce Fenner & Smith Inc and Eagle Strategies LLC broke s206(2) Investment Advisors Act 1940. It has censured them and ordered them to cease and desist from future violations, to disgorge their ill-gotten gains, to pay prejudgment interest, to return the money to investors and to do other onerous jobs.

The SEC also charged Cozad Asset Management, which told it that it had broken various laws to do with share class selections. It did so, however, some months after the deadline set by the initiative. Cozad failed to tell its clients enough about the 'conflicts' that arose from its (and its associated persons’) selection of more expensive mutual fund share classes on their behalf when lower-cost share classes for the same fund were available. The SEC’s order - also made in its own court - finds that Cozad broke ss206(2 and 4) Advisors Act and Rule 206(4)-7 issued thereunder, censured it, ordered it to cease and desist from future violations, ordered it to disgorge its ill-gotten gains, pay prejudgment interest of more than $400,000 plus a civil penalty of $10,000, return the money to investors and do various onerous jobs.

Since September the SEC has only issued orders against two firms that were eligible to confess their sins in line with the initiative but failed to do so. These were Mid Atlantic Financial Management (ordered to pay $1,027,002 in disgorgement and prejudgment interest and a civil penalty of $300,000) and BPU Investment Management (ordered to pay $692,107 in disgorgement and prejudgment interest and a civil penalty of $235,000).