In February, 2018 the U.S. Securities and Exchange Commission (“SEC”) announced an initiative to SEC registered investment advisory firms to self-disclose issues relating to its selection of mutual fund share classes that paid the adviser (as a dually registered broker-dealer) or its related entities or individuals a fee pursuant to Rule 12b-1 of the Investment Company Act of 1940 ("12b-1" fee) when a lower-cost share class for the same fund was available to clients. The Share Class Selection Disclosure Initiative was intended to identify and promptly remedy clients who paid such additional fees.
On March 11, 2019, PAS, without admitting or denying the findings, consented to the entry of an Order Instituting Administrative and Cease and-Desist Proceedings (“Order”) by the SEC. Pursuant to the Order, the SEC found that from January 1, 2014 through October 31, 2018, certain PAS clients participating in investment advisory programs were invested in mutual fund share classes with higher costs (in the form of Rule 12b-1 fees) without adequately disclosing that a lower-cost share classes (without Rule 12b-1 fees) of the same funds were available. Specifically, PAS did not adequately disclose conflicts of interest related to its receipt of 12b-1 fees, and the availability of mutual fund share classes that did not pay such fees. PAS consented to the entry of the Order that it violated Sections 206(2) and 207 of the Investment Advisers Act of 1940 and agreed to cease and desist from committing or causing any violations and any future violations of Sections 206(2) and 207. PAS agreed to pay disgorgement and prejudgment interest to affected clients. Additionally, as part of the Order PAS has enhanced its disclosure regarding mutual fund share class selection, considered whether existing clients should be moved to a lower-cost share class, and updated its policies and procedures regarding mutual fund share class selection.
Please note, since March 2016, except for certain money market sweep investment vehicles, PAS has been crediting Rule 12b-1 fees back to clients invested in mutual funds through the Firm’s proprietary advisory programs. PAS has been crediting Rule 12b-1 fees back to retirement accounts since late 2009.