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Regulation and Compliance > Federal Regulation > SEC

RIA Busted in SEC 12b-1 Wrap Fee Crackdown

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What You Need to Know

  • HighPoint avoided transaction fees by recommending share classes from a no-transaction-fee program offered by its clearing firm.
  • Those shares had a higher cost to investors, the SEC said.
  • The RIA was ordered to pay disgorgement, prejudgment interest and a civil penalty, totaling $764,737.

The Securities and Exchange Commission on Wednesday charged HighPoint Advisor Group with investing certain clients’ assets in higher-cost mutual fund share classes — as part of a wrap fee arrangement — that included 12b-1 fees.

According to the SEC’s order, HighPoint Advisor Group LLC, a registered investment adviser, invested certain clients’ assets in higher-cost mutual fund share classes than were otherwise available while failing to disclose the conflicts of interest associated with those investment recommendations.

HighPoint offers a wrap program option to its advisory clients.

“Under its arrangement with clients in wrap accounts, HighPoint was responsible for paying client trading costs — including transaction fees on mutual fund investments — as part of the overall management fee clients paid HighPoint,” the SEC said.

The SEC said in late March that its exam priorities for 2022 include RIAs’ use of 12b-1 fees in wrap accounts where the RIA may be responsible for paying transaction fees.

Since at least January 2014 and continuing until 2019, HighPoint and its investment advisor representatives, or IARs, “avoided incurring transaction fees for some client transactions by recommending mutual fund share classes from a no transaction-fee program offered by its clearing firm, including those that charged fees pursuant to Rule 12b-1 of the Investment Company Act of 1940, often instead of lower-cost share classes of the same fund that were available to clients for a transaction fee,” the SEC explained.

While HighPoint and its IARs did not receive any of these 12b-1 fees, “by investing clients in NTF share classes, HighPoint and its IARs avoided paying transaction fees on client trades of these mutual funds,” the SEC said.

The RIA also failed to provide “full and fair disclosure to clients concerning its use of mutual fund share classes offered through” the NTF program in wrap accounts and its associated conflicts of interest, the SEC said.

HighPoint was ordered to pay disgorgement, prejudgment interest and a civil penalty, totaling $764,737 as follows: disgorgement of $508,995 and prejudgment interest of $130,742, and a civil penalty of $125,000.