SEC Hits Madison Avenue Securities Over Revenue Sharing, 12b-1 Fees

The Securities and Exchange Commission on Tuesday charged Madison Avenue Securities with breaching its fiduciary duties in connection with its receipt of third-party compensation, including 12b-1 fees.

According to the SEC order, Madison, a dually registered investment advisor and broker-dealer, failed to provide full and fair disclosure regarding conflicts of interest associated with its receipt of:

• revenue sharing payments from its unaffiliated clearing broker as a result of sweeping cash into certain money market mutual funds since at least February 2016;
• fees pursuant to Rule 12b-1 under the Investment Company Act of 1940 from at least February 2016 to April 2018; and
• revenue sharing payments from its clearing broker for no-transaction-fee mutual fund investments since at least February 2016.

With respect to the 12b-1 fees, Madison, although eligible to do so, “did not self-report to the Commission pursuant to the Division of Enforcement’s Share Class Selection Disclosure Initiative,” the order states.

Madison also “breached its duty to seek best execution by causing advisory clients to invest in share classes of mutual funds when share classes of the same funds were available to clients that presented a more favorable value for these clients under the particular circumstances in place at the time of the transactions, and also breached its duty of care by failing to undertake an analysis to determine whether the particular mutual fund share classes and money market funds it recommended were in the best interests of its advisory clients,” the order states.

The San Diego-based firm also failed to adopt and implement “written compliance policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder in connection with its practices concerning cash sweep revenue sharing, mutual fund and money market fund share class selection, and NTF revenue sharing,” the SEC said.

The firm was ordered to pay disgorgement, prejudgment interest and a civil penalty totaling $803,174 as follows: disgorgement of $579,524, prejudgment interest of $73,650 and a civil money penalty of $150,000.