The Securities and Exchange Commission (“SEC”) announced this month that four investment advisory firms—Merrill Lynch, RBC Capital Markets, Eagle Strategies, and Cozad Asset Management—agreed to pay $4.72 million to settle charges that they recommended and sold mutual share classes to its customers when cheaper shares were available to those investors. The majority of that sum, namely, $3.88 million, is attributable to RBC Capital Markets. The mutual fund fee disgorgements resulting from the settlements with the SEC are part of the SEC’s initiative, launched in February 2018, wherein the SEC agreed to waive civil penalties against investment advisers who self-reported and admitted that they had been putting investors into high-fee mutual fund classes and agreed to reimburse those customers. These settlements are the last ones the SEC will accept as it concludes the mutual fund amnesty program.
A mutual fund share class represents an interest in the same portfolio of securities with the same investment objective, with the primary difference being the fee structures. For example, some mutual fund share classes charge what are called “12b-1 fees” to cover fund distribution and sometimes shareholder service expenses. Many mutual funds, however, also offer share classes that do not charge 12b-1 fees, and investors who hold these shares will almost always earn higher returns because the annual fund operating expenses tend to be lower over time.
In the various cease and desist orders, the SEC found that Merrill Lynch, RBC Capital Markets, Eagle Strategies, and Cozad Asset Management purchased, recommended or held for their clients mutual fund share classes that paid the firms or the advisors 12b-1 fees instead of lower cost share classes of the same funds for which their customers are also eligible. The firms also failed to disclose these conflicts of interest, either in its Forms ADV or otherwise, related to their receipt of 12b-1 fees and/or the selection of mutual fund share classes that pay higher fees and result in higher commissions to the investment advisors. Investment advisors owe a fiduciary duty to their customers to act in their best interest, including disclosing conflicts of interest. The SEC found that the investment advisory firms’ failures to adequately disclose that the advisors were actually incentivized to recommend funds with higher fees when the same mutual funds without those fees were available violated the firms and advisors’ fiduciary duty to their customers.
- Dabney O’Riordan, co-chief of the SEC’s Asset Management Unit, said that “[t]his incredibly successful initiative led to the return of almost $140 million to harmed investors, stopped wrongful conduct, and highlighted the importance of an adviser’s obligations to provide full and fair disclosures to clients.”
While the SEC’s program has concluded, the agency says it is still monitoring other investment advisory firms and will continue to actively pursue disclosure failures that have benefitted firms and advisers to the detriment of their customers.
Lax & Neville has significant experience with securities cases involving mutual fund share classes, excessive fees and commissions, breach of fiduciary duty and failure to meet disclosure requirements. If you have suffered investment losses resulting from a firm’s investment recommendation, an investment advisor’s breach of fiduciary duty, or the failure to disclose a conflict of interest, contact Lax & Neville LLP today at (212) 696-1999 and schedule a consultation.