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Regulation and Compliance > Federal Regulation > SEC

SEC Hits Merrill Over 12b-1 Fees

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A Merrill Lynch branch office (Photo: AP)

The Securities and Exchange Commission ordered Merrill Lynch to reimburse investors $325,376 for failing to disclose its conflict of interest when selecting more expensive mutual fund share classes for its advisory clients when lower-cost share classes were available for those clients, the regulator said Friday.

The mutual fund share classes that Merrill Lynch chose charged 12b-1 fees, while lower-cost share classes of the same funds that the clients were eligible for did not charge fees, the SEC noted in an order that was posted online. “The firm received 12b-1 fees in connection with these investments” and “failed to disclose” that in its Form ADV, according to the SEC.

The SEC announced that it settled charges against Merrill Lynch and another smaller advisory firm. Both companies self-reported as part of the Division of Enforcement’s Share Class Selection Disclosure Initiative. A third advisory firm also self-reported within months of the initiative’s self-reporting deadline, the SEC said.

Asked for comment Monday, Merrill Lynch spokesman Bill Halldin said only that his firm self-reported as part of the SEC initiative.

The SEC found that Merrill Lynch and New York-based Eagle Strategies violated Section 206(2) of the Investment Advisers Act of 1940, and ordered that they be censured, that they cease and desist from future violations, that they pay disgorgement and prejudgment interest totaling over $425,000, and that they comply with certain undertakings, including returning the money to investors.

The $325,376 that the SEC ordered Merrill Lynch to return to investors included disgorgement of $297,394 and prejudgment interest of $27,982, the regulator said in its order. The $101,090 that the SEC ordered Eagle Strategies to return to its investors included disgorgement of $89,978 and prejudgment interest of $11,113, according to the separate SEC order.

The SEC also charged Cozad Asset Management, finding that the Champaign, Illinois, firm failed to fully disclose the conflicts that arose from its and its associated persons’ selection of more expensive mutual fund share classes for clients when lower-cost share classes for the same fund were available, according to the third SEC order. Cozad was censured and ordered to pay disgorgement and prejudgment interest totaling $416,870 that included disgorgement of $369,424 and prejudgment interest of $37,446, as well as a civil penalty of $10,000. Cozad and Eagle Strategies did not immediately respond to requests for comment.

The SEC’s orders against the three firms were the final cases the Division intended to recommend under the terms of the share class initiative, the regulator said Friday. Including the three actions, the SEC has ordered more than $139 million to be returned to investors as part of the initiative, it said.

As part of the same initiative, the SEC on March 11, 2019, ordered 79 investment advisors to reimburse more than $125 million to clients. Those firms included Wells Fargo Advisors Financial Network and Wells Fargo Clearing, Ameritas, Cambridge Investment Research, Commonwealth Equity Services, D.A. Davidson & Co., Deutsche Bank Securities, Janney Montgomery Scott, Kestra Advisory Services, LPL Financial, Next Financial, Oppenheimer & Co., Oppenheimer Asset Management, Raymond James Financial Services Advisors, RBC Capital Markets, Robert W. Baird & Co., Stifel & Nicolaus & Co. and Woodbury Financial Services.


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