Group of Advisors Says SEC Lawsuit Would Smoothly Regulate Mutual Funds

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US Securities and Exchange Commission (SEC) Headquarters in Washington, DC REUTERS / Andrew Kelly

  • Industry group says lawsuit against Ambassador Advisors would set new standard for disclosure
  • Accuses the agency of bypassing the rule-making process

July 20 (Reuters) – A group of investment advisers urged a Pennsylvania federal judge to rule against the United States Securities and Exchange Commission in a case it says effectively creates a stricter disclosure rule for mutual fund fees.

The Financial Services Institute said in an amicus brief filed Monday that the SEC was engaging in “rule-making through enforcement” in its lawsuit against investment adviser Ambassador Advisors.

The group said the lawsuit seeks to set a precedent requiring advisers who charge fees on certain mutual fund stocks to use specific language when alerting clients to lower-cost options.

An SEC spokesperson did not immediately respond to a request for comment on Monday.

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

Dozens of advisers settled with the agency as part of a 2018 amnesty program that allowed them to report failures themselves to tell clients they were receiving what is known as a 12b-fee. 1 to direct clients to certain classes of mutual fund shares when lower cost options were available.

The SEC sued the ambassador and his owners last year, alleging they breached their fiduciary duties to clients for failing to disclose their 12b-1 disputes to clients between 2014 and 2018.

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

The SEC argued that the company’s information on the fees was too vague and that it should have informed customers of the lower-cost options.

The defendants said they disclosed the conflict of interest inherent in receiving 12b-1 fees from certain mutual fund stocks and that there was no SEC rule or guideline requiring more.

In a supporting brief for the defendants on Monday, the ISP argued that the lawsuit seeks to bypass the formal rule-making process to require advisers to notify clients when a lower-cost share class is available. and apply the standard retroactively.

The case targeted not only the lawsuit against the ambassador, but also the 2018 amnesty program, which saw 96 investment advisers declare themselves to the agency and repay $ 135 million to their clients.

“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 heavy remediation plan” that will threaten the advisers’ activities, the group wrote.

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

For ISPs: 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

Read more:

SEC Settlement with Investment Advisors on Selling Mutual Funds

Jody godoy

Jody Godoy reports on banking and stock market law. Contact her at [email protected]


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