On March 11, 2019, the Securities and Exchange Commission released an Order Instituting Administrative and Cease-and-Desist Proceedings pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940, publishing the names of those broker/dealers who had self-reported during its Share Class Selection Disclosure Initiative. This was prudent for all investment advisory firms who purchased, recommended or held for advisory client’s mutual fund share classes that charged 12b-1 fees instead of lower-cost share classes of the same funds for which clients were eligible. Self-reporting registered investment advisors (hybrid broker/dealers) were required to reimburse clients for all 12b-1 fees, paying disgorgement and prejudgment interest to affected investors, pursuant to a disbursement calculation.
It was our opinion that this issue would have a broad sweeping effect on the industry, thus we were shocked to learn that only 79 firms self-reported. This is evidenced by the fact that the SEC has been active in investigating firms who did not self-report, and have already brought disciplinary actions including disgorgements, pre-judgement interest, and additional fines to multiple firms in the months following their initial order. We expect this trend to continue as the SEC continues to investigate firms who did not self-report.
L.M. Kohn & Company was one of these 79 self-reporting firms. Accordingly, L.M. Kohn & Company immediately refunded clients for any affected shares they purchased, plus interest as disgorgement, and paid its SEC fine, all from the firm’s cash flow with no effect on the company’s net cap.
Self-reporting to the SEC and immediately returning clients’ fees, investments and income is reflective of L.M. Kohn & Company’s strong culture of compliance and advisor freedom. Given that the vast majority of affected registered investment advisory firms and hybrid broker/dealer firms did not disclose, we feel this voluntary undertaking sets us apart from the rest. Having the ability to immediately cover all disgorgements without borrowing additional funds is a testament to the firm’s solvency and integrity of its leadership.
Since its founding in 1990, L. M. Kohn has experienced no regulatory issues arising from non-compliance, and we intend to maintain these high standards moving forward.
