In an effort to align enforcement with efficiency, many regulators are increasingly turning to self-disclosure and cooperation initiatives to incentivize fund managers to come forward and admit bad behavior in exchange for leniency. The SEC recently announced the newest and most narrow of these: the Share Class Selection Disclosure Initiative (SCSD Initiative). By offering favorable settlement terms, the SCSD Initiative is intended to encourage investment advisers to admit failures to properly disclose their selection of mutual fund share classes that paid a fee pursuant to Rule 12b‑1 of the Investment Company Act of 1940 when lower-cost share classes for the same funds were available to clients. See “Recent SEC Settlement Evidences Agency’s Continued Aggressive Enforcement of Conflicts of Interest
” (Sep. 21, 2017); and “$97 Million SEC Settlement Highlights Perils of Inaccurate Disclosures and the Agency’s Continued Focus on Conflicts of Interest and Client Overcharges
” (May 25, 2017). This initiative serves as a reminder to all fund advisers of the SEC’s focus on conflicts of interest. In addition, due to its narrow nature – including the short timeframe for taking advantage of its benefits and the potential penalties for non-compliance – some may wonder whether the SCSD Initiative signals a retreat from the “regulatory-lite
” approach anticipated under the Trump administration. This article analyzes the SCSD Initiative, including its terms and what it could portend for all private fund managers. For more on self-reporting, see “How Fund Managers Can Maintain Work Product Protection During Investigations After the Herrera Decision
” (Feb. 22, 2018); and “Newly Revealed CFTC Self-Reporting and Cooperation Regime Could Offer Benefits to Fund Managers, or Lead to Increased Enforcement
” (Oct. 19, 2017).