Adviser group says SEC lawsuit would sneak-regulate mutual funds

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(Reuters) – An investment adviser industry group urged a Pennsylvania federal judge to rule against the U.S. Securities and Exchange Commission in a case it says effectively creates a stricter disclosure rule for mutual fund fees.

Headquarters of the U.S. Securities and Exchange Commission (SEC) in Washington, D.C. REUTERS/Andrew Kelly

The Financial Services Institute said in an amicus brief filed Monday that the SEC is engaging in “rulemaking by enforcement” through its lawsuit against investment adviser Ambassador Advisors.

The group claimed the lawsuit seeks to set a precedent requiring advisers who earn fees off certain mutual fund shares to use specific language when alerting clients to lower cost options.

A spokesperson for the SEC did not immediately reply to a request for comment on Monday.

The case is part of the SEC’s multi-year crackdown on disclosures around mutual fund share classes and fees.

Dozens of advisers settled with the agency under a 2018 amnesty program allowing them to self-report failures to tell clients they were receiving what are known as 12b-1 fees for steering clients to certain mutual fund share classes when lower cost options were available.

The SEC sued Ambassador and its owners last year, alleging they had breached their fiduciary duties to clients for failing to disclose their 12b-1 conflicts to clients between 2014 to 2018.

Both sides asked U.S. District Judge John Gallagher in Allentown for summary judgment last week.

The SEC has argued that the firm’s disclosures about the fees were too vague and that it should have told clients about lower cost options.

The defendants have said they did disclose the conflict of interest inherent in receiving 12b-1 fees from certain mutual fund shares and that there was no SEC rule or guidance requiring more.

In a brief in support of the defendants on Monday, FSI argued that the lawsuit seeks to circumvent the formal rulemaking process to require advisers to tell clients when a lower-cost share class is available, and to apply the standard retroactively.

The filing took aim not only at the lawsuit against Ambassador, but also at the 2018 amnesty program, which saw 96 investment advisers self-report to the agency and repay their clients $135 million.

“If the SEC continues to penalize investment advisers for failing to meet the new standards, the rest of the industry could be exposed to a burdensome remediation project” that will threaten advisers’ businesses, the group wrote.

The case is SEC v. Ambassador Advisors LLC et al, U.S. District Court, Eastern District of Pennsylvania, No. 20-CV-02274

For FSI: Kymberly Kochis of Eversheds Sutherland

For the defendants: Joel Forman, Donald David, Shawn Taylor and Jordan Mobley of Akerman

For the SEC: Christopher Kelly, Jennifer Chun Barry, Michael Macko

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