Close Close
ThinkAdvisor

Regulation and Compliance > Federal Regulation > SEC

Northwest Advisors Hit With SEC Fine Over 12b-1, Wrap Fees

X
Your article was successfully shared with the contacts you provided.

What You Need to Know

  • Advisory clients paid excess fees on their investments.
  • NWA advised certain clients in its wrap fee program to purchase or hold mutual fund share classes that charged 12b-1 fees.
  • SEC ordered Northwest Advisors to pay disgorgement, prejudgment interest and a civil money penalty.

The Securities and Exchange Commission has fined Northwest Advisors in connection with its mutual fund share class selection practices and the excess fees paid by advisory clients in its wrap fee program, including 12b-1 fees.

According to the SEC’s order, from March 26, 2014 through Dec. 31, 2018, NWA purchased, recommended, or held for certain advisory clients mutual fund share classes that charged 12b-1 fees (which did not result in NWA paying transaction fees) instead of lower-cost share classes of the same funds that were available to the clients and did not charge 12b-1 fees (but did result in NWA paying transaction fees).

As a result, “the advisory clients paid excess fees on their investments and NWA avoided paying transaction fees for trades placed in those clients’ accounts,” the SEC states.

Northwest Advisors “did not adequately disclose this practice or the related conflict of interest in its Forms ADV or otherwise,” the SEC said.

NWA also breached its duty to seek best execution by causing certain advisory clients to purchase mutual fund share classes that charged 12b-1 fees when lower share classes of the same funds were available.

The SEC ordered Northwest Advisors to pay disgorgement and prejudgment interest, totaling $902,500, as well as a $245,000 civil money penalty.

NWA was registered with the commission as an investment advisor from November 2013 through Dec. 31, 2018, and provided advisory services to retail clients through wrap fee arrangements.

In its Form ADV dated March 26, 2018, before NWA wound down its advisor services, the firm reported that it had $362 million in regulatory assets under management.

During the relevant period, the order states, the advisory firm “was responsible for paying transaction fees arising from transactions by clients in its wrap fee program. NWA advised certain clients in its wrap fee program to purchase or hold mutual fund share classes that charged 12b-1 fees to the clients when lower-cost share classes of those same funds that would have resulted in NWA paying transaction fees were available to them.”

Although NWA did not receive the 12b-1 fees, the order states, “it benefited from selecting the higher-cost mutual fund share classes by avoiding incurring transaction fees that it otherwise would have had to pay.”

From March 2014 through March 2018, Northwest Advisors “made no disclosures in its wrap fee program brochure relating to 12b-1 fees or the conflict associated with its selection of mutual fund share classes,” the order states.

In its Form ADV dated March 26, 2018, while the advisory firm made its first disclosure regarding its mutual fund share class selection practices, that disclosure was inadequate, the SEC said.

Northwest Advisors “was obligated to disclose all material facts to its clients, including any conflicts of interest between itself and its clients that could affect the advisory relationship and how those conflicts could affect the advice NWA provided its clients,” the SEC said.