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Regulation and Compliance > Federal Regulation > SEC

SEC Charges Top-Ranked Tennessee Advisor Over 12b-1 Fees

By Jeff Berman

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A Franklin, Tennessee RIA with $1.1 billion in assets under management and advisement, along with its principal officer and an advisor at the firm, have been charged with failing to disclose conflicts of interest, the Securities and Exchange Commission said Tuesday.

In a complaint filed Friday in U.S. District Court for the Middle District of Tennessee in Nashville, the SEC claimed CapWealth Advisors; Timothy J. Pagliara, its founder, chairman and chief investment officer; and Timothy R. Murphy, an advisor at the firm and managing director of wealth management, did not adequately disclose conflicts of interest related to their mutual fund share class selection practices.

Pagliara was named the top advisor in Tennessee by Forbes and Barron’s in 2020, with a minimum account size for new business of $750,000, custodied team assets of $836 million and a typical size of household accounts ranging from $1-$30 million.

“We do not negotiate with regulatory thugs that harass our clients, who to a person back our efforts to provide cost-effective professional advice and financial services,” Pagliara told ThinkAdvisor on Wednesday.

Pagliara singled out a claim on page 22 of the complaint that he alleged “illustrates the frivolous nature of these charges.” The SEC said there were a total of 95 instances “where we collectively overcharged clients $6,800 out of” $18 million in revenue the 2016-2018 period, he noted.

“Unlike some in the industry who [choose] to settle these rulemaking enforcement claims, we choose to fight and look forward to our day in court,” he added.

More Details

The SEC’s complaint alleged that, from at least June 2015 until June 2018, the defendants “failed to disclose adequately the material conflicts of interests with respect to the 12b-1 fees Pagliara and Murphy received, through CapWealth’s affiliated broker-dealer, from their advisory clients’ investments in mutual funds.”

As a result, the defendants “prevented their advisory clients from the opportunity to provide informed consent to these conflicts,” the complaint alleged.

According to the complaint, the 12b-1 fees were paid to an affiliated BD under common ownership and control with CapWealth, which in turn paid some of the fees directly to Murphy as compensation, and indirectly to Pagliara, via his majority stake in CapWealth’s holding company.

The complaint also alleged that CapWealth, Pagliara and Murphy breached their duty to seek best execution for their clients’ mutual fund share class purchases by causing certain advisory clients to invest in fund share classes that charged 12b-1 fees when share classes of the same funds that presented a more favorable value for the clients were also available.

CapWealth also failed to adopt and implement written policies and procedures designed to prevent such violations, the complaint alleged. CapWealth was eligible to self-report to the SEC pursuant to the Division of Enforcement’s Share Class Selection Disclosure Initiative, but did not do that, the SEC pointed out.

As a result of their actions, the defendants violated the Investment Advisers Act of 1940, the SEC said. It seeks financial penalties against the defendants, as well as disgorgement of ill-gotten gains plus prejudgment interest from Pagliara and Murphy.

— Related on ThinkAdvisor:

Jeff Berman

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