The SEC‘s long-awaited strikes against investment advisors for failing to place investors in less expensive Class I shares threaten to go from a trickle to a deluge with the recent enforcement action against three affiliates of AIG–Royal Alliance Associates, SagePoint Financial and FSC Securities Corp.
The SEC appears determined to stop what it views as breaches of fiduciary duty and disclosure failure relating to conflicts of interests arising from the practice of placing investors in more expensive share classes, thereby generating more revenue for the firms.
The three AIG affiliates—which agreed to pay $9.5 million to the SEC–placed clients in share classes that charged fees for marketing and distribution even though the clients were eligible to buy shares in an institutional share class, or Class I, that did not charge such 12b-1 fees. The SEC claimed that the choice of a more expensive share class allowed the affiliates to improperly collect an additional $2 million in fees from investors—fees that the advisors received in their capacity as broker-dealers and shared with their registered representatives.
The SEC also charged the firms with a failure to disclose in their Forms ADV, client service agreements, and other account documentation the fact that the firms had a conflict of interest with respect to selecting fund share classes created by the financial incentive to put clients in higher fee share classes over lower-fee share classes of the same fund.
The firms resolved the action by agreeing to pay a penalty of $7.5 million and disgorgement of $2 million and by retaining an independent compliance consultant.
The AIG action comes on the heels of the settlement announced this past December in which J.P. Morgan Securities and JPMorgan Chase Bank paid $267 million and admitted wrongdoing which also related to a failure to disclose conflicts of interest in connection with the practice of investing clients in more expensive share classes of the firms’ proprietary funds.
As a result of the violations, the firms obtained $127.5 million in fees that they were forced to disgorge. In addition, the firms agreed to pay a matching penalty of $127.5 million, plus nearly $12 million in prejudgment interest on the disgorgement amount.