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Advisory Firm to Pay Nearly $2M to SEC Over 12b-1 Fees, Revenue Sharing

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What You Need to Know

  • JWCA’s mutual fund share class selection practices resulted in an unaffiliated BD receiving three types of fees.
  • The firm was ordered to pay disgorgement, prejudgment interest and a civil penalty, totaling approximately $1.95 million.
  • The firm failed to disclose the conflicts on its Form ADV or elsewhere.

The Securities and Exchange Commission has charged yet another advisor, this time Jonathan Roberts Advisor Group, doing business as J.W. Cole Advisors Inc. (JWCA), with infractions related to mutual fund share class selection practices and receipt of 12b-1 fees.

According to the SEC’s order, JWCA’s mutual fund share class selection practices resulted in an unaffiliated broker-dealer, J.W. Cole Financial, Inc. (JWCF), receiving three types of fees – 12b-1, revenue sharing, and cash sweep fees — as a result of JWCA’s advisory clients’ investments at times from January 2014 through March 2021.

The fees that JWCF received, the SEC said, resulted in a benefit to JWCA due to an expense sharing agreement between JWCA and JWCF.

The expense sharing agreement reduced the amount JWCA paid to JWCF under that agreement when JWCA placed its clients in certain investments that paid higher fees to JWCF, the order states.

The fees included:

(1) fees JWCF received when JWCA purchased, recommended or held for clients mutual fund share classes that paid fees pursuant to Rule 12b-1 under the Investment Company Act of 1940 instead of lower-cost available share classes for the same funds that did not charge these fees;

(2) fees JWCF received from its unaffiliated clearing broker as a result of JWCA’s advisory clients’ investments in share classes of mutual funds for which the Clearing Broker paid revenue sharing instead of lower-cost available share classes for the same funds that were not eligible for such payments; and

(3) fees JWCF received from its Clearing Broker as a result of JWCA sweeping its advisory clients’ cash into certain money market mutual funds instead of lower-cost share classes for the same money market funds that were available to clients that did not result in the payment of fees to JWCF.

The firm was ordered to pay disgorgement, prejudgment interest and a civil penalty, totaling approximately $1.95 million.

JWCF’s receipt of the 12b-1 fees had the effect of benefiting JWCA, but JWCA did not adequately disclose this conflict of interest in its Forms ADV or otherwise, the SEC states.

The periodic receipt of revenue sharing had the effect of benefiting JWCA, but JWCA also failed to disclose this conflict of interest in its Forms ADV or otherwise.

JWCA, headquartered in Tampa, Florida, has been registered with the SEC as an investment advisor since November 2001.

In its Form ADV dated March 31, JWCA reported that it had approximately $3.93 billion in regulatory assets under management, including approximately $1.3 billion from 953 high-net-worth individual clients and $2.5 billion from 17,379 other individual clients.

JWCA provides advisory services through its IARs, many of whom are registered representatives of JWCF.