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Regulation and Compliance > Federal Regulation

Sole-Proprietor RIA Becomes Latest Target of SEC's 12b-1 Fee Actions

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What You Need to Know

  • KMA’s clients paid 12b-1 fees and commissions to an introducing broker-dealer, a portion of which were shared with KMA and its owner.
  • Since the beginning of 2022, the SEC has continued to levy 12b-1 fee related actions.
  • According to the SEC complaint, KMA “failed to fully and adequately disclose this arrangement and the conflicts of interest arising therefrom.”

The Securities and Exchange Commission has charged former registered investment advisor KM Advisory Services with investing the “vast majority” of clients’ assets in mutual funds that paid 12b-1 fees.

In addition, the SEC alleges that KMA, an unincorporated sole proprietorship purchased by John Paul Harnish in February 2020, charged sales load commissions exclusively through an introducing broker-dealer with whom Harnish was a registered rep.

According to the SEC complaint, the activity started in January 2016 and continued from the date Harnish purchased KMA through December 2020.

As a result, “KMA’s clients paid 12b-1 fees and commissions to the Introducing Broker-Dealer, a portion of which were shared with KMA and Harnish,” the SEC said.

Since the beginning of 2022, the SEC has continued to levy 12b-1 fee-related actions:

  • In January, O.N. Investment Management Co. was charged with advising clients to buy or hold mutual fund share classes that charged 12b-1 fees
  • In March, City National Rochdale LLC, an RIA, agreed to pay more than $30 million related to 12b-1 fee infractions
  • In April, HighPoint Advisor Group was charged with investing certain clients’ assets in higher-cost mutual fund share classes — as part of a wrap fee arrangement — that included 12b-1 fees
  • In May, Madison Avenue Securities was charged with breaching its fiduciary duties in connection with its receipt of third-party compensation, including 12b-1 fees

KMA was registered with the SEC as an investment advisor from 1996 until August 2021, when it ceased operation and filed a Form ADV-W.

As of March 2021, the date of KMA’s most recent annual amendment to its Form ADV, KMA managed 177 advisory clients with over $172 million in assets, the SEC states. Harnish, 47, resides in Pittsford, New York and was an investment adviser rep of KMA, its director of financial planning and its chief compliance officer from 2004 through August 2021.

KMA, according to the SEC complaint, “failed to fully and adequately disclose this arrangement and the conflicts of interest arising therefrom. KMA also breached its duty of care by not routinely comparing the Introducing Broker-Dealer’s order execution with other broker-dealers, which KMA’s advisory relationship with its clients required.”

KMA therefore “caused its advisory clients to invest through the Introducing Broker-Dealer and in share classes of mutual funds that charged 12b-1 fees when other broker-dealers made available share classes of the same funds to their customers that may have presented a more favorable value,” the SEC said.

KMA 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 mutual fund share class and broker-dealer selection practices,” the SEC said.

As a result of the conduct described above, KMA willfully violated Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder.

The SEC ordered KMA to pay within 10 days of its order filing: disgorgement of $220,097; prejudgment interest of $5,549 and a $75,000 civil money penalty. In addition, KMA was ordered to notify affected investors of its settlement terms within 40 days.