Berthel Fisher & Company Financial Services, an Iowa-based, double-registered broker / dealer and investment advisor with nearly $ 800 million in assets under management, has settled charges with the Securities and Exchange Commission over allegations it failed to resolve disputes in Referring to recommendations of certain investment funds to disclose share classes that contain fees of 12b-1.
the Settlement offer, filed on September 16, is the latest in a series of SEC enforcement actions for similar conduct. Based in Chicago just a few days earlier Rothschild investment company, an RIA and broker / dealer with approximately $ 1.6 billion in assets under management, has settled the commission for 12b-1 disclosure violations. Rothschild also failed to report these violations to the Commission itself in 2018 Disclosure initiative for the selection of share classesalthough it was entitled to.
Kurt Wolfe, an attorney in the SEC Enforcement Practice at law firm Quinn Emanuel Urquhart & Sullivan, said the enforcement issue was “low hanging fruit” for the Commission’s Enforcement Division. SEC employees understand the nuances of how such actions manifest themselves in companies after working on the disclosure initiative that allowed companies to notify the SEC of previous disclosure violations in exchange for leniency on penalties.
“I think they have a ‘you know when you see it’ reaction by now. When the reviewers look at what they’re doing, they might ask, “What does this company do if they have products with multiple grades?” Wolf said. “It becomes a pretty repeatable thing for them to identify and charge.”
Mutual funds often offer different types of share classes with similar objectives and characteristics, but may differ in their fee structure for various reasons. This may lead to situations where advisors would recommend a particular class of shares with elevated 12b-1 fees that would reduce returns for the investor but increase profits for the adviser or broker selling the fund.
Beginning in January 2014, Berthel Fisher’s investment advisors received 12b-1 fees from the recommended or purchased mutual fund share classes for clients, even if lower-priced share classes of the same mutual fund were available as directed by the SEC. The company has also failed to disclose the inherent conflicts on their Form ADV or elsewhere. In April 2018, the company began crediting advisory customer accounts with the 12b-1 fees charged by recommending certain purchases.
The SEC has also beaten the company for failing to disclose revenue sharing payments from its cleaning brokers based on the amount of client assets invested in certain cash sweep accounts.
“The payments BFCFS received created an incentive for BFCFS to recommend to its advisory clients to buy or hold share classes that paid 12b-1 fees versus other share classes of the same mutual fund that did not pay 12b-1 fees, if they provide investment advice for BFCFS advisory services. “Customers,” read the 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 attorney and author of the BrokeAndBroker.com to blog. For Singer, in addition to the Commission’s increasing familiarity with 12b-1 fees following the voluntary disclosure initiative, this postponement has contributed to an increase in enforcement measures.
Singer argued that 12b-1 fees originally served as a way for mutual funds to encourage b / ds to market their product to consumers. He said that 12b-1’s fees had become more important to brokerage firms as a continuous source of mutual fund income, and that times had changed since 12b-1 was viewed as some sort of “legitimate” marketing fee.
“12b-1 hasn’t changed, but the way we look at it,” said Singer. “It’s away from what we thought would help clients with due diligence (and) now it’s seen as a reward, a bribe to move forward, even when you know it isn’t the best option . “
The SEC has taken action against other companies for similar failures in recent months. In August, JW Cole advisor, a Florida-based RIA with approximately $ 3.93 billion in assets under management.
Also based in Dallas for August ISC consultant, a hybrid b / d and RIA with assets exceeding $ 1 billion, settled with the SEC for recommending more expensive stock classes while the Colorado Dual Registrant Cascade Investment Group agreed to an injunction, conviction, and civil penalty of $ 125,000 for alleged similar violations.
In June, Centaurus finance, a California-based company with $ 2.7 billion in assets under management, agreed to pay $ 1.2 million for alleged non-disclosure of share class conflicts later that month Crown Capital Securities, another California company with approximately $ 1.17 billion in assets under management, has reached an agreement with regulators on similar claims. Although most of these measures end in settlements between the SEC and the companies, Tennessee-based company CapWealth Advisors has denied the SEC’s allegations regarding share class recommendations, with a jury trial scheduled for no later than next June.
While such cases are becoming more common, companies still benefit from avoiding lengthy investigations as the process and the resulting penalties can be costly. Even after completing the SEC’s disclosure initiative, Wolfe said there are some remedial actions a company could take if it had 12b-1 errors in the background, including tracking its own internal actions and audits. Proactive disclosure to the SEC could also lead to favorable treatment, with Wolfe noting that in some cases the penalties provided for in settlement proceedings are not excessive; he speculated that in these cases firms may have turned to the Commission and not the other way around.
While such cases can take some time depending on the size of the company, Wolfe expected the SEC to pursue them further, believing the commission staff would not conclude that it is fully pursuing these cases had.
“The SEC was pretty clear; “If you don’t come in and speak to us, we know there are others and we will look for you,” he said. “And they were.”
In the most recent lawsuits, the BFCFS has neither admitted nor denied the findings, but has failed and convicted and paid more than $ 150,000 of interest and prejudice interest and a civil sanction of. agreed to $ 235,000. Rothschild Investment neither admitted nor denied the findings, but also consented to an omission and a reprimand. In addition, the order states that Rothschild will pay more than $ 1.9 million aggregate levy and prejudice interest and a civil penalty of $ 400,000.