Close Close

Regulation and Compliance > Federal Regulation > SEC

SEC Bars Advisor, Fines Another for 12b-1 Infractions

Your article was successfully shared with the contacts you provided.

The Securities and Exchange Commission continues its assault on 12b-1 fees.

In two recent actions, the agency barred the principal and chief compliance officer of an advisory firm for failing to disclose in Form ADV a 12b-1 fee revenue sharing arrangement with a broker-dealer as well as the firm’s financial condition, and a former Credit Suisse advisor agreed to pay more than $2 million for recommending A-class shares that carried a 12b-1 fee instead of lower-expense institutional shares.

In the first case, Stephen D. Alison and Alison LLC, a registered investment advisor wholly owned and controlled by Alison, failed to disclose in ALLC’s Form ADV filings that ALLC’s distressed financial condition was reasonably likely to impair its ability to meet contractual commitments to clients, the SEC says.

Moreover, for more than three years, during a time when the firm had “escalating financial difficulties,” Alison generated about 8.3% to 11.2% of the revenue produced from the firm’s advisory clients from 12b-1 fee payments that were charged to clients by third parties.

“These fees were ultimately paid to Alison out of client assets,” the order states. “Alison failed to disclose to clients that cheaper share classes that did not pay the 12b-1 fees, but had identical holdings, were available.” Alison and his firm “had a conflict of interest with their clients as they were incentivized to choose fund share classes that carried 12b-1 fees over those that did not.”

As the order states, the mutual funds paid 12b-1 fees on an annual, quarterly or monthly basis to intermediaries such as broker-dealers whose customer purchased shares.

Alison was a registered rep with a broker-dealer that received the 12b-1 fees from mutual funds. The broker-dealer paid to Alison approximately 95% of all 12b-1 fees generated from the advisory firm’s clients who were invested in the fund classes that imposed these fees.

During the relevant time period, “Alison received 12b-1 fees that equated to approximately eight to thirteen percent of the advisory fees paid” to his advisory firm. “His receipt of 12b-1 fees created a material conflict of interest between respondents and their clients,” the order states.  

The SEC explained in the order that “as the sole owner and chief compliance officer, it was [the respondent’s] responsibility to review and ensure the accuracy” of Form ADV. The advisor “should have known that the Forms ADV contained materially misleading statements and omitted material facts” but he “failed to exercise reasonable care in reviewing and signing” the ADV.

The SEC barred Alison from the industry and revoked his firm’s registration.

Former Credit Suisse Advisor Hit With $2M Fine

In the second case, the SEC on April 4 found that Sanford Michael Katz, a former Credit Suisse Securities advisor, breached his fiduciary duty in connection with his purchases and recommendations of mutual fund shares for advisory clients.

Between Jan. 1, 2009 and Jan. 21, 2014, Katz purchased or held Class A mutual fund shares for advisory clients who were eligible to purchase or hold less expensive institutional share classes of the same mutual funds.

During the relevant period, Katz’s practice of putting advisory clients in Class A shares when those clients were eligible for less expensive institutional share classes resulted in Credit Suisse collecting approximately $2.5 million in 12b-1 fees, approximately $1.1 million of which was paid to Katz, the SEC order states.

“This practice was inconsistent with Katz’s fiduciary duty, his representations to clients, and his obligation to obtain best execution for his advisory clients,” the SEC said. 

Katz was order to pay disgorgement of $1.1 million, prejudgment interest of more than $197,000, and a civil money penalty of $850,000 to the SEC.

— Check out The SEC Investor Advocate’s View Askew: The Illusion of Fee Disclosure on ThinkAdvisor.


© 2023 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.