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Practice Management > Compensation and Fees

Dually Registered Firm Penalized for 12b-1 Fee Infractions

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A dually registered firm has been ordered to pay more than $927,000 for breaching its fiduciary duty by collecting 12b-1 fees on mutual fund share classes when lower cost funds were available.

BPU Investment Management, Inc., a dually registered investment advisor and broker-dealer, was ordered on Feb. 13 to pay disgorgement, prejudgment interest, and a civil penalty totaling $927,107.

From December 2013 through May 2017 BPU purchased, recommended or held for advisory clients mutual fund share classes that charged 12b-1 fees instead of lower-cost share classes of the same funds that were available to the clients, according to the SEC order.

While BPU received 12b-1 fees in connection with the investments, the firm failed to adequately disclose this conflict of interest in its Forms ADV or otherwise, the order states.

Further, BPU failed to adopt and implement written compliance policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder in connection with its mutual fund share class selection practices.

BPU, although eligible to do so, also did not self-report to the Commission pursuant to the Division of Enforcement’s Share Class Selection Disclosure Initiative.

James Lundy, partner in Faegre Drinker Biddle & Reath’s Chicago office, said the BPU case “appears to be one of the follow-up cases based on their [the SEC's] investigative efforts into firms who did not self-report, but that the SEC alleges qualified for the SCSDI.”

The agency also said BPU failed to seek best execution for its clients and failed to adopt and implement written policies and procedures reasonably designed to disclose conflicts of interest presented by its mutual fund share class selection practices.

Cipperman Compliance Services stated in a note on the action that “revenue sharing is dead. We don’t think an advisor could include enough disclosure to satisfy the SEC where the advisor recommends a share class more expensive that a comparable share class that does not result in adviser payola.”

The BPU case, Cipperman opined, is also “another example of the failed dual-hat Chief Compliance Officer model.”

BPU Investment Management, Inc., headquartered in Pittsburgh, has been registered with the Commission as an investment advisor since 2001 and as a broker-dealer since 1985.

In its Form ADV dated March 29, 2019, BPU reported that it had approximately $517 million in regulatory assets under management.


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