Close Close

Regulation and Compliance > Federal Regulation > SEC

Roundup: SEC 12b-1 Settlements, Wells in Hot Seat, and Treasury Regs Housecleaning

Your article was successfully shared with the contacts you provided.

The Securities and Exchange Commission continues its crackdown on 12b-1 fees, announcing a slew of advisors would pay investors a hefty $125 million for overpriced funds. Meanwhile, Wells Fargo’s CEO took a bipartisan drubbing on Capitol Hill and the Treasury Department decided to kill nearly 300 tax regulations to comply with an executive order by President Donald Trump.

Share Class Infraction Settlement Wells Fargo Advisors Financial Network and Wells Fargo Clearing along with Next Financial were among the 79 investment advisors that will return $125 million to clients as part of settled actions for directly or indirectly receiving 12b-1 fees for investments selected for clients without adequate disclosure, including disclosures that were inconsistent with the advisors’ actual practices.

The orders are part of the agency’s Share Class Disclosure Initiative, which was launched by the securities regulator’s enforcement division last February to identify and correct ongoing harm in the sale of mutual fund shares by investment advisors.

The SEC said “a substantial majority” of the $125 million will go to retail investors. Other advisors involved include Deutsche Bank, Cambridge Investment Research, Kestra Advisory Services and LPL Financial.

The initiative incentivized advisors to self-report violations of the Advisers Act resulting from undisclosed conflicts of interest, promptly compensate investors, and review and correct fee disclosures.

The SEC’s orders found that the investment advisors failed to adequately disclose conflicts of interest related to the sale of higher-cost mutual fund share classes when a lower-cost share class was available.

Specifically, “the SEC’s orders found that the settling investment advisors placed their clients in mutual fund share classes that charged 12b-1 fees — which are recurring fees deducted from the fund’s assets — when lower-cost share classes of the same fund were available to their clients without adequately disclosing that the higher cost share class would be selected,” the SEC said.

According to the SEC’s orders, the 12b-1 fees were routinely paid to the investment advisors in their capacity as brokers, to their broker-dealer affiliates, or to their personnel who were also registered reps, creating a conflict of interest with their clients, as the investment advisors stood to benefit from the clients’ paying higher fees.

“The federal securities laws impose a fiduciary duty on investment advisors, which means they must act in their clients’ best interest,” said Stephanie Avakian, co-director of the SEC’s Division of Enforcement, in announcing the settlements. “An advisor’s failure to disclose these types of financial conflicts of interest harms retail investors by unfairly exposing them to fees that chip away at the value of their investments.”

Steven Peikin, co-director of the enforcement division, said the initiative “leveraged the expertise of the agency in crafting an efficient approach to remedy a pervasive problem. Most of the advisory clients harmed by the disclosure practices were retail investors, and in just a year’s time, we made tremendous headway in putting money back into their hands while significantly improving the quality of firms’ disclosures.”

The SEC’s orders found that the settling advisors violated Section 206(2) and, except with respect to state-registered only advisors, Section 207 of the Investment Advisers Act of 1940 by: • Failing to include adequate disclosure regarding the receipt of 12b-1 fees; and/or • Failing to adequately disclose additional compensation received for investing clients in a fund’s 12b-1 fee paying share class when a lower-cost share class was available for the same fund.

Without admitting or denying the findings, each of the settling advisors consented to cease-and-desist orders finding violations of Section 206(2) and, except with respect to state-registered only advisors, Section 207.

The firms also agreed to a censure and to disgorge the improperly disclosed fees and distribute these monies with prejudgment interest to affected advisory clients.

Each advisor also has undertaken to review and correct all relevant disclosure documents concerning mutual fund share class selection and 12b-1 fees and to evaluate whether existing clients should be moved to an available lower-cost share class and move clients, as necessary.

Consistent with the terms of the initiative, the commission has agreed not to impose penalties against the advisors.

Wells Fargo Under Fire — Again Wells Fargo President and CEO Tim Sloan received a bipartisan grilling in mid-March over the bank’s “egregious” consumer abuses spanning more than a decade, with House Financial Services Committee Chairwoman Maxine Waters, D-Calif., stating that Wells Fargo is a “recidivist financial institution that creates widespread harm with a broad range of offenses.”

During the heated committee hearing, dubbed “Holding Megabanks Accountable: An Examination of Wells Fargo’s Pattern of Consumer Abuses,” Waters stated that Wells Fargo’s “misconduct appears to persist,” citing an article published Saturday in The New York Times stating that the bank’s employees “continue to see internal rule breaking to meet aggressive sales goals.”

Sloan told the committee, however, that during his more than two years as CEO, the bank has “gone above and beyond what is required in disclosing these issues in our public filings, we have worked to remedy these issues, and, most importantly, we have worked to address root causes that allowed them to occur in the first place. As a result, Wells Fargo is a better bank than it was three years ago, and we are working every day to become even better.”

Wells Fargo, Sloan added, is “equally committed to preventing new problems from developing. To do that, we have transformed our approach to risk management by fundamentally changing the organization of Wells Fargo.”

Waters noted the “unprecedented” 2018 Federal Reserve Board asset cap on the bank’s growth, which remains in place today. The cap, along with punishments and fines, Water stated, “have not changed the bank’s behavior,” and Wells Fargo continues to rake in huge profits. (The bank made a profit of $6.1 billion in the fourth quarter, beating expectations, but has shed more than 1,000 advisors since the scandal became public in 2016.)

Sloan’s testimony, however, did not alleviate Raymond James analysts’ concerns, who maintain Wells’ underperform rating. The “fallout from the account opening scandal will not end near-term, pushing-out expectations for a recovery,” the analysts said, adding that they believe “revenue continues to decline and profitability metrics remain below-peer.”

Negative headlines, the analysts said, “will continue to cause hesitation by potential customers from doing business with Wells, and place Wells at a competitive disadvantage in keeping and attracting bankers.”

Regulators, Waters continued, also refuse “to take forceful actions against the bank, but instead are weakening Dodd-Frank safeguards protecting consumers and the economy from large firms like Wells Fargo.”

Stated Waters: “Wells Fargo’s ongoing lawlessness and failure to right the ship suggest that the bank, with approximately $1.9 trillion in assets and serving one in three U.S. households, is simply too big to manage.”

Tax Reg Spring Cleaning The U.S. Department of the Treasury did some early spring cleaning, tossing out almost 300 tax regulations that it no longer thought were necessary, according to an announcement in mid-March.

Specifically, Treasury gave the green light to repeal 296 tax regulations it deemed regulatory “deadwood” as part of the two executive orders signed by President Trump. These rules “do not have any current or future applicability under the Internal Revenue Code,” according to the IRS.

The subject matter of the various tax regulations includes extensions of the grace period for foreclosure property by a real estate investment trust, investment credit for movie and television films, qualified joint and survivor annuities and estate tax provisions.

Treasury Secretary Steven Mnuchin said in a statement. “By eliminating nearly 300 regulations that serve no useful purpose to taxpayers, we are building a more efficient tax regulatory system that promotes economic growth.”

—Elizabeth Festa contributed to this report.

Washington Bureau Chief Melanie Waddell can be reached at [email protected]