Berthel Fisher & Company Financial Services, a doubly registered Iowa-based broker / dealer and investment advisor with nearly $ 800 million in regulatory assets under management, has settled charges with the Securities and Exchange Commission for failing to disclose conflicts concerning the recommendations of certain mutuals. fund share classes that included fees 12b-1.
The settlement offer, which was filed on September 16, is the latest in a series of SEC enforcement actions for similar conduct. Only a few days earlier, based in Chicago Rothschild Investment Company, an RIA and broker / trader with approximately $ 1.6 billion in assets under management, has settled with the commission for 12b-1 disclosure violations. Rothschild also failed to report these violations in the commission’s 2018 report Share Class Selection Disclosure Initiative, even if he had the right to do so.
Kurt Wolfe, an attorney in the SEC Enforcement Practice of the law firm Quinn Emanuel Urquhart & Sullivan, said the enforcement issue was a “handy fruit” for the Enforcement Division of the commission. SEC staff became well acquainted with the nuances of how such actions manifest in companies after working on the Disclosure Initiative, in which companies were able to inform the SEC of previous disclosure failures in exchange for leniency on penalties.
“So now I think they have a kind of ‘you know when you see it’ kind of reaction. If the review staff are looking at what they’re doing, they might be wondering ‘what is this company doing when there is has products with multiple classes? “says Wolfe.” It becomes a fairly repeatable thing for them to identify and load. “
Mutual funds often offer different types of share classes with similar goals and attributes, but may differ in fee structures for a variety of reasons. This potentially leads to situations where advisers may recommend a particular share class with high 12b-1 fees that would reduce returns for the investor but increase profits for the advisor or broker selling the fund.
As of January 2014, investment advisory representatives at Berthel Fisher received 12b-1 commissions on the categories of mutual fund shares they recommended or purchased for clients, even when categories of mutual funds More affordable shares of the same mutual funds were available, according to the SEC order. The company also failed to disclose the inherent conflicts on their Form ADV or elsewhere. In April 2018, the company began crediting the 12b-1 fees generated by recommending certain purchases to advisory client accounts on a future basis.
The SEC also criticized the company for not disclosing the revenue sharing payments of its cleaning brokers based on the amount of client assets invested in certain cash transfer accounts.
“The payments received by BFCFS prompted BFCFS to recommend to its advisory clients to buy or hold share classes that paid a fee of 12b-1 compared to other share classes of the same mutual funds that did not pay a 12b-1 fee when providing investment advice to the board of BFCFS. customers ”, we read in order.
The context in which the commission and the industry view 12b-1 fees has also changed over time, according to Bill Singer, a securities lawyer and author of the BrokeAndBroker.com Blog. For Singer, this change has helped speed up enforcement action, in addition to the board’s increased familiarity with the 12b-1 fee as a result of the self-report initiative.
Singer argued that the 12b-1 fee initially worked as a way for mutual funds to encourage b / ds to market their product to consumers. He said the 12b-1 fee had become more important to brokerage firms as a continuing source of mutual fund income, and times had changed since 12b-1 was seen as some kind of fee. of “legitimate” marketing.
“12b-1 hasn’t changed, but the way we look at it has changed,” Singer said. “It’s not something that we thought was helping clients do their due diligence anymore, (and) now it’s seen as a reward, a bribe to push something even when you know it is.” is not the best option. “
The SEC has cracked down on other companies for similar failures in recent months. In August, JW Cole Advisors, a Florida-based RIA with approximately $ 3.93 billion in assets under management, was fined $ 1.6 billion for such lapses, while Northwest Advisors, a former Pennsylvania-based RIA, agreed to pay more than $ 900,000 to affected investors based on similar allegations.
Also in August, based in Dallas ISC Advisors, a b / d and RIA hybrid with more than $ 1 billion in assets, settled with the SEC for recommending more expensive share classes, while the dual-registered Colorado Cascade Investment Group accepted a cease and desist, censorship and a civil fine of $ 125,000 for allegedly committing similar violations.
In June, Centaurus Financial, a California company with $ 2.7 billion in assets under management agreed to pay $ 1.2 million for allegedly failing to disclose share class conflicts, while the same month Crown equity securities, another California company with around $ 1.17 billion in assets under management, has settled similar claims with the regulator. Although the majority of these actions result in settlements between the SEC and the companies, the The Tennessee CapWealth Advisors disputed the SEC’s claims regarding the share class recommendations, with a jury trial scheduled for no later than June next year.
Even though these kinds of cases are becoming more common, companies still have an interest in avoiding lengthy investigations, as the process and resulting penalties can be costly. Even with the conclusion of the SEC’s disclosure initiative, Wolfe said a company can take some corrective action if it has 12b-1 shortcomings in its track record, including pursuing its own internal actions and corporate action. meticulous examination. Proactive disclosure to the SEC could also lead to favorable treatment, with Wolfe noting that in some cases the penalties included in settlement actions were not excessively high; he speculated that in these cases companies could have gone to the commission, not the other way around.
While such cases could take some time to develop depending on the size of the company, Wolfe expected the SEC to continue to pursue them, believing that commission staff would not be able to come up with it. conclusion that they had pursued these cases as far as possible.
“The SEC has been pretty clear; “If you don’t come talk to us, we know there are more in space and we will come and find you,” he said. “And they were.”
In the case of the most recent actions, although the BFCFS neither admitted nor denied the findings, it accepted a ceasefire and censorship, as well as the payment of restitution and pre-judgment interest totaling more than of $ 150,000, as well as a penalty of $ 235,000. Likewise, Rothschild Investment neither admitted nor denied the findings, but also agreed to a ceasefire and censorship. In addition, Rothschild will pay restitution and pre-judgment interest totaling more than $ 1.9 million, as well as a civil fine of $ 400,000, according to the order.
