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Regulation and Compliance > Federal Regulation > SEC

Dually Registered Firm Must Pay SEC $1.2M Over 12b-1 Fees

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What You Need to Know

  • Centaurus also received revenue sharing from its investment in certain mutual funds and cash sweeps without disclosing conflicts.
  • Centaurus breached its duty to seek best execution by causing advisory clients to invest in fund shares that charged 12b-1 fees.
  • It's not a surprise that there are still some 12b-1 cases in the SEC’s pipeline, says attorney Lundy.

Centaurus Financial Inc., a dually registered investment advisor and broker-dealer based in California, has agreed to pay the Securities and Exchange Commission more than $1.2 million for providing inadequate disclosures regarding its receipt of 12b-1 fees from client investments.

Centarus was ordered to pay disgorgement of $907,377, prejudgment interest of $124,019, and a civil penalty of $250,000.

The SEC order also finds that Centaurus received revenue sharing from its investment in certain mutual funds and cash sweeps without fully and fairly disclosing the conflict of interest to its clients.

Centaurus was eligible to self-report to the Commission pursuant to the Division of Enforcement’s Share Class Selection Disclosure Initiative, which ended last April, but did not do so.

As the SEC explains, 12b-1 fees are fees paid out of mutual fund or ETF assets to cover the costs of distribution – marketing and selling mutual fund shares – and sometimes to cover the costs of providing shareholder services.

According to the order, “Centaurus breached its duty to seek best execution by causing certain advisory clients to invest in fund shares that charged 12b-1 fees when share classes of the same funds were available to the clients that presented a more favorable value under the particular circumstances in place at the time of the transactions.”

The firm also failed to implement policies and procedures to prevent the violations, the agency said.

Jim Lundy, partner with Faegre Drinker in Chicago, told ThinkAdvisor Thursday in an email that “it is not a surprise that there are still some cases in their [the SEC’s] pipeline that are and will be instituted” regarding the Share Class Selection Disclosure Initiative.

“There will likely also be cases issued regarding the various revenue sharing sweep-like investigations that were opened towards the end of the SCSD Initiative,” Lundy said.