SEC hits 79 self-reporting Investment advisors with $125 million initiative

The Securities and Exchange Commission (SEC) has settled charges against 79 investment advisers who will return more than $125 million to clients, most of whom are retail investors. The actions stem from the SEC’s Share Class Selection Disclosure Initiative, which the SEC’s Division of Enforcement announced in February 2018 in an effort to identify and promptly correct ongoing harm in the sale of mutual fund shares by investment advisers.

The initiative incentivized investment advisers to self-report violations of the Advisers Act resulting from undisclosed conflicts of interest, promptly compensate investors, and review and correct fee disclosures. The orders issued today address advisers who directly or indirectly received 12b-1 fees for investments selected for their clients without adequate disclosure, including disclosures that were inconsistent with the advisers’ actual practices.

The SEC’s orders found that the investment advisers failed to adequately disclose conflicts of interest related to the sale of higher-cost mutual fund share classes when a lower-cost share class was available. Specifically, the SEC’s orders found that the settling investment advisers placed their clients in mutual fund share classes that charged 12b-1 fees – which are recurring fees deducted from the fund’s assets – when lower-cost share classes of the same fund were available to their clients without adequately disclosing that the higher cost share class would be selected. According to the SEC’s orders, the 12b-1 fees were routinely paid to the investment advisers in their capacity as brokers, to their broker-dealer affiliates, or to their personnel who were also registered representatives, creating a conflict of interest with their clients, as the investment advisers stood to benefit from the clients’ paying higher fees.

History of share class selection-related violations

Investment advisers, as fiduciaries, have an obligation to make full and fair disclosure to clients and prospective clients concerning their material conflicts of interest, including conflicts arising from financial incentives, and to act consistently with those disclosures. This principle is reflected in Form ADV, which reminds advisers of their general obligation to fully disclose material facts relating to their advisory business and specifically requires disclosure concerning the compensation and fees that advisers and their supervised persons receive, including from asset-based charges and service fees.

In light of these obligations, since at least 2013, the Commission has charged investment advisers with failing to disclose conflicts of interest and failing to implement reasonably designed policies and procedures relating to mutual fund share classes, in violation of the Investment Advisers Act. In those cases, the Commission generally required the investment advisers to pay disgorgement and penalties and to distribute the funds to harmed clients. In 2016, the Commission’s Office of Compliance Inspections and Examinations issued a Risk Alert specifically addressing share class disclosure and cautioning investment advisers to examine their policies and procedures. FINRA has similarly addressed share class selection issues with brokers, imposing censures and fines on brokers that failed to provide adequate disclosures.

According to Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement, “The federal securities laws impose a fiduciary duty on investment advisers, which means they must act in their clients’ best interest. An adviser’s failure to disclose these types of financial conflicts of interest harms retail investors by unfairly exposing them to fees that chip away at the value of their investments.”

Steven Peikin, Co-Director of the SEC’s Division of Enforcement added, “The initiative leveraged the expertise of the agency in crafting an efficient approach to remedy a pervasive problem. Most of the advisory clients harmed by the disclosure practices were retail investors, and in just a year’s time, we made tremendous headway in putting money back into their hands while significantly improving the quality of firms’ disclosures.”

Terms of the Settlement

The SEC’s orders found that the settling investment advisers violated Section 206(2) and, except with respect to state-registered only advisers, Section 207 of the Investment Advisers Act of 1940 by:

• Failing to include adequate disclosure regarding the receipt of 12b-1 fees; and/or
• Failing to adequately disclose additional compensation received for investing clients in a fund’s 12b-1 fee-paying share class when a lower-cost share class was available for the same fund.

Firms Charged:

1. Ameritas Investment Corp.
2. AXA Advisors LLC
3. BB&T Securities LLC
4. Beacon Investment Management LLC
5. Benchmark Capital Advisors LLC
6. Benjamin F. Edwards & Co. Inc.
7. Blyth & Associates Inc.
8. BOK Financial Securities Inc.
9. Calton & Associates Inc.
10. Cambridge Investment Research Advisors Inc.
11. Cantella & Co. Inc.
12. Client One Securities LLC
13. Coastal Investment Advisors Inc.
14. Comerica Securities Inc.
15. Commonwealth Equity Services LLC
16. CUSO Financial Services LP
17. D.A. Davidson & Co.
18. Deutsche Bank Securities Inc.
19. EFG Asset Management (Americas) Corp.
20. Financial Management Strategies Inc.
21. First Citizens Asset Management Inc.
22. First Citizens Investor Services Inc.
23. First Kentucky Securities Corporation
24. First National Capital Markets Inc.
25. First Republic Investment Management Inc.
26. Hazlett, Burt & Watson Inc.
27. Hefren-Tillotson Inc.
28. Huntington Investment Company, The
29. Infinex Investments Inc.
30. Investacorp Advisory Services Inc.
31. Investmark Advisory Group LLC
32. Investment Research Corp.
33. J.J.B. Hilliard, W.L. Lyons LLC
34. Janney Montgomery Scott LLC
35. Kestra Advisory Services LLC
36. Kestra Private Wealth Services LLC
37. Kovack Advisors Inc.
38. L.M. Kohn & Company
39. LaSalle St. Investment Advisors LLC
40. Lockwood Advisors Inc.
41. LPL Financial LLC
42. M Holdings Securities Inc.
43. MIAI Inc.
44. National Asset Management Inc.
45. NBC Securities Inc.
46. Next Financial Group Inc.
47. Northeast Asset Management LLC
48. Oppenheimer & Co. Inc.
49. Oppenheimer Asset Management Inc.
50. Park Avenue Securities LLC
51. PlanMember Securities Corporation
52. Popular Securities LLC
53. Principal Securities Inc.
54. Private Portfolio Inc.
55. ProEquities Inc.
56. Provise Management Group LLC
57. Questar Asset Management Inc.
58. Raymond James Financial Services Advisors Inc.
59. Raymond Lawrence Lent (d/b/a The Putney Financial Group, Registered Investment Advisors)
60. RBC Capital Markets LLC
61. Robert W. Baird & Co. Incorporated
62. Ryan Financial Advisors Inc.
63. SA Stone Investment Advisors Inc.
64. Santander Securities LLC
65. Select Money Management Inc.
66. Silversage Advisors
67. Sorrento Pacific Financial LLC
68. Spire Wealth Management LLC
69. SSN Advisory Inc.
70. Stephens Inc.
71. Stifel, Nicolaus & Company Incorporated
72. Summit Financial Group Inc.
73. Syndicated Capital Inc.
74. TIAA-CREF Individual & Institutional Services LLC
75. Transamerica Financial Advisors Inc.
76. Trustcore Financial Services LLC
77. Wells Fargo Clearing Services LLC
78. Wells Fargo Advisors Financial Network LLC
79. Woodbury Financial Services Inc.

How does self-reporting work for compliance?

Sometimes, to great effect. However, as seen here, sometimes a firm or its members from stray. That’s where Patrina comes in. We’ve built our business based on helping organizations stay on the “straight and narrow” efficiently and cost-effectively. So, let’s talk. Call 212-233-1155 to ask about Patrina’s cost-effective, designated third-party services, our comprehensive 8-module compliance solution, and compliant data capture & file storage, and records archiving specifically designed for the financial services community. Be smart. Be covered.