In its continued crackdown on mutual fund share class selection, the Securities and Exchange Commission announced settled charges Friday with two investment advisory firms and one of the firm’s CEOs for choosing funds that paid 12b-1 fees despite less expensive share classes of the same funds being available.
According to the SEC’s orders, American Portfolios Advisors, PPS Advisors and PPS CEO and Chief Investment Officer Lawrence Nicholas Passaretti selected mutual fund share classes inconsistent with their disclosures to clients. (American Portfolios Advisors is the registered investment advisor of the broker-dealer American Portfolios Financial Services.)
The SEC is requiring the firms and the CEO to collectively pay more than $1.8 million, which will be returned to harmed investors.
American Portfolios and PPS were not eligible to self-report pursuant to the Division of Enforcement’s Share Class Selection Disclosure Initiative (announced in February), because the Division contacted them about the disclosure violations before the initiative was announced.
The SEC orders find that American Portfolios Advisors and PPS — both based in Holbrook, New York — failed to disclose conflicts of interest, violated their duty to seek best execution, and failed to implement policies and procedures designed to prevent violations of federal securities laws in connection with their mutual fund share class selection practices.
“In disclosures to clients, American Portfolios incorrectly stated that its [investment advisor representatives or] IARs either did not receive 12b-1 fees or only selected the more expensive share classes when less expensive share classes of the same fund were unavailable, while PPS incorrectly stated that it selected higher-cost share classes for the ‘long-term benefit’ of clients and only where less expensive share classes of the same fund were unavailable,” the SEC stated.
During the relevant period, from July 2012 to March 2016, APA offered asset management services to its advisory clients through a wrap fee advisory program called Advisor’s Choice. The wrap fee program enabled APA’s 200 IARs to invest client assets in various mutual funds across numerous fund complexes.
American Portfolios Advisors’ IARs, the order explains, “in many instances purchased, recommended, or held, on behalf of certain Advisory Clients, mutual fund share classes that charged 12b-1 fees (primarily Class A shares) when those clients were otherwise eligible to invest in less expensive share classes of those same funds (primarily Class I shares).”
As a result, the IARs received 12b-1 fees that they would not have collected had Advisory Clients been invested in less expensive share classes.
American Portfolios Advisors’ “affiliated broker-dealer collected 12b-1 fees and paid a portion of the fees to its registered representatives, who acted as IARs for the advisory clients,” the SEC order states.
In a statement shared with ThinkAdvisor, American Portfolios Advisors, said that “we believe that we were successful in reaching a favorable resolution of this matter. The settlement was the result of an exhaustive effort by APA, originating with an SEC examination that commenced in October 2015. In reaching a resolution, APA considered the costs associated with a potential litigation.”
Without admitting or denying the SEC’s findings, American Portfolios agreed to pay $895,353 in disgorgement and prejudgment interest and a civil penalty of $250,000.
PPS and Passaretti agreed to pay $631,746 in disgorgement and prejudgment interest and a civil penalty of $75,000.
PPS Advisors was registered with the Commission as an investment advisor from March 2010 until March 2018.
PPS, which provided advisory services through some 10 IARs, is no longer registered as an investment advisor and no longer advises clients.
C. Dabney O’Riordan, chief of the SEC Enforcement Division’s Asset Management Unit, said in a statement that “advisors must be vigilant in disclosing all conflicts of interest arising from compensation received based on investment decisions made for clients. The documents these advisers provided to clients were incorrect and investors were harmed. We are continuing our efforts to stop these violations and return money to harmed investors as quickly as possible.”
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