Three AIG affiliates – Royal Alliance Associates, SagePoint Financial, and FSC Securities Corp. – agreed Monday to pay $9.5 million to the Securities and Exchange Commission for steering mutual fund clients into more expensive share classes so the firms could collect more fees.
Royal Alliance, SagePoint and FSC Securities consented to the SEC’s order without admitting or denying the findings and agreed to disgorgement of more than $2 million in improper fees plus prejudgment interest and a $7.5 million penalty.
An SEC investigation found that the firms placed clients in share classes that charged fees for marketing and distribution despite the clients being eligible to buy shares in fund classes without those additional charges.
As a result, the SEC says, the firms collected approximately $2 million in extra fees, and they failed to disclose their conflict of interest in selecting share classes that would generate more revenue for them.
“Investment advisors must be vigilant about conflicts of interest when selecting mutual fund share classes because the choice may improperly benefit them at the expense of their clients,” said Marshall Sprung, co-chief of the SEC Enforcement Division’s Asset Management Unit, in a statement. The unit has been probing conflicts of interest and disclosure around mutual fund share class selection.
According to the SEC’s order instituting a settled administrative proceeding, the AIG affiliates also failed to monitor advisory accounts on a quarterly basis to prevent reverse churning, or putting investors in fee-based accounts with little or no activity or service to justify the fee.
The firms had compliance policies and procedures to ensure that fee-based or “wrap” advisory accounts that charged an inclusive fee for both advisory services and trading costs remained in the best interest of clients that traded infrequently, but failed to implement those policies and procedures, the SEC states.
AIG Advisor Group said in a statement that it was “pleased to have reached a settlement with the SEC over two issues,” which the agency “raised” and that occurred between 2012 and 2014 at three affiliates. “We cooperated with the SEC’s investigation while working to enhance the processes at issue. Advisor Group takes compliance with securities regulations seriously and remains focused on serving the best interests of our clients.”
Lightyear Capital is in the process of buying the Advisor Group from AIG.
— Check out 12b-1 Fees in Crosshairs at SEC — and DOL on ThinkAdvisor.