Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Regulation and Compliance > Federal Regulation > SEC

Kestra to Pay $10.3M Over Undisclosed Mutual Fund Compensation

Your article was successfully shared with the contacts you provided.

What You Need to Know

  • Kestra advisors failed to disclose compensation received by their affiliated BD when investing client assets in certain mutual funds.
  • The firm and several of its rivals have been hit with similar penalties over mutual funds in the past.
  • Without admitting or denying the SEC's findings, Kestra also agreed to cease-and-desist orders.

Two Kestra Financial divisions have been ordered by the Securities and Exchange Commission to pay a total of $10.3 million for failing to disclose compensation received by their affiliated broker-dealer when investing client assets in certain mutual funds.

In separate orders filed on Friday, the SEC alleged Kestra Advisory Services and Kestra Private Wealth Services, collectively referred to as the Kestra Advisers, selected mutual funds for clients which their affiliated BD received revenue sharing payments from the clearing broker, violating Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7.

Without admitting or denying the SEC’s findings, Kestra Advisory Services agreed to pay disgorgement of $7.2 million, prejudgment interest of $1.3 million and a civil penalty of $1.5 million, while Kestra Private Wealth Services, also without admitting or denying the findings, will pay disgorgement of $208,187, prejudgment interest of $31,382 and a civil penalty of $60,000.

The Kestra Advisers also agreed to cease-and-desist orders, to be censured, and to distribute the funds to harmed investors, according to the SEC.

“The Kestra companies cooperated with the SEC throughout the course of the investigation and are pleased to have reached a resolution of the matter,” Stephen Langlois, president of Kestra Financial, said on Monday.

This was not the first time that Kestra was ordered to compensate clients over mutual funds the firm received compensation for.

The SEC said in 2019 that 79 investment advisors, including Kestra Advisory Services, agreed to 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.

Those investors also included Wells Fargo Advisors Financial Network and Wells Fargo Clearing, Next Financial, Deutsche Bank, Cambridge Investment Research and LPL Financial.

More Details

As stated in Friday’s SEC orders, certain mutual funds chosen by Kestra representatives paid revenue sharing and were more expensive than lower-cost options available to clients, including instances when there were lower-cost share classes of the same mutual funds available to clients that did not result in any revenue sharing.

The orders also found that the Kestra Advisers’ affiliated BD received compensation that resulted from transaction fees charged on mutual fund trades and non-transaction fees for certain services provided to the Kestra Advisers’ advisory clients, which were greater than the amount charged to their affiliated BD by the clearing broker for those trades and services (fee markups).

The Kestra Advisers allegedly breached their fiduciary duties to advisory clients by failing to provide full and fair disclosure regarding the two types of compensation received by their affiliated BD and the related conflicts of interest, according to the SEC.

The orders also found that the Kestra Advisers failed to adopt and implement policies and procedures designed to prevent violations of the federal securities laws regarding their mutual fund share class selection, fee markup practices, and best execution, and that the Kestra Advisers violated their duty to seek best execution.

Pictured: SEC headquarters in Washington (Photographer: Andrew Harrer/Bloomberg)


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.