Is Your Stock Broker in Trouble with the Law?


The Securities and Exchange Commission (SEC) has placed a bulls-eye on brokers who they believe are overcharging their clients in violation of their fiduciary duty.  This is a pro-consumer initiative that has some brokers scrambling to determine if they are affected.

On February 12th, 2018, the SEC Division of Enforcement announced the ‘Share Class Selection Disclosure Initiative (SCSD)’ because of what they believe to be wide-spread abuse by investment advisors who sold their clients high-fee share class mutual funds when lower-cost share classes of the same mutual fund were available.  Why would brokers do that?  One reason is to earn higher commissions.

Stephanie Avakian, co-director of the Division of Enforcement, had this to say:

 “This focused initiative reflects our effort to allocate our resources in a way that effectively targets the continued failure by some advisers to disclose conflicts of interest around share class selection and, importantly, is intended to facilitate the prompt return of money to victimized investors.”

The SEC is offering these brokers a form of amnesty if they self-report their violations to the SEC before June 12th, 2018.  Brokers who self-report will not face fines but will be required to ‘disgorge’ excess commissions back to the clients.

Who is affected

Let me begin by stating that most brokers are good, honest people doing their best to serve their clients.  Unfortunately, there are some brokers who are more focused on the commissions they receive to the detriment of their clients.  The focus of this SEC initiative is brokers who sell mutual funds with 12b-1 fees.  A 12b-1 fee is an annual marketing and distribution fee charged by some mutual fund companies on certain of their mutual funds.

Are you a victim?  Take this Quiz:

  1. Does your broker receive commissions for mutual funds sold to you?

Yes      No       I don’t know

  1. Do you own a mutual fund(s) that imposes 12b-1 fees?

Yes      No       I don’t know

If you answered ‘Yes’ or ‘I don’t know’ to either question, you may have been sold a high-fee mutual fund.  If you think this might be the case, here’s what you can do:

  • Get your most recent brokerage statement and find the symbol for the mutual fund you own and enter it in the search engine of com. Click on ‘profile’ and then scroll down to where they show fees and you’ll see if they use 12b-1 fees.
  • If your fund uses 12b-1 fees, call your broker and ask if there is a different class of the same mutual fund with lower fees. If you determine there is, see if you can switch without incurring either additional fees/commissions or any income tax consequences.

Understand that 12b-1 fees are not necessarily a bad thing.  A discount broker such as Charles Schwab & Company will often have one mutual fund with 12b-1 fees and the same fund with a lower management fee that does not have 12b-1 fees.  However, the more expensive 12b-1 fund will be offered with ‘no transaction fees’…meaning, when you invest, you don’t pay any trading costs, which can be as high as $35 per trade.  This 12b-1 fund becomes much less expensive compared to the non-12b-1 fund depending on how many trades you do in a given year.  This is especially true for investors who are using an auto-investing program.

One thing that might happen is brokers who fall under this initiative but who don’t want to file the disclosure with the SEC, might start shifting clients out of 12b-1 share class mutual funds into less expensive alternatives.  If you notice a lot of trading of your mutual funds, this might be the reason.