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RIA Hit With $5.8M SEC Penalty for 12b-1 Fee Infractions Tied to Wrap Accounts

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What You Need to Know

  • PAG and its IARs avoided incurring transaction fees in wrap accounts by investing clients’ assets in funds that charged 12b-1 fees.

The Securities and Exchange Commission on Thursday slapped Private Advisor Group with a $5.8 million penalty for 12b-1 fee related infractions tied to its wrap fee program.

The SEC said Friday that the Morristown, New Jersey-based RIA 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.

PAG has about $34 billion in regulatory assets under management, according to the SEC.

Among other services, PAG offers a wrap program option to its advisory clients. Under its arrangement with clients in wrap accounts, PAG was responsible for paying client trading costs — including transaction fees on mutual fund investments — as part of the overall management fee clients paid to PAG, the SEC explained.

However, PAG deducted any transaction fees incurred in wrap accounts directly from its investment adviser representatives’ compensation.

Since at least July 2014, PAG and its IARs avoided incurring transaction fees for wrap client transactions by investing certain clients’ assets in mutual fund share classes from a no-transaction fee program offered by its clearing firm, the SEC order states.

Some of the mutual fund share classes charged 12b-1 fees when lower-cost share classes of the same fund were available to clients through the clearing firm for a transaction fee. “Although PAG and its IARs did not receive any of these 12b-1 fees, by investing clients in NTF share classes, PAG and its IARs avoided paying transaction fees on client trades of these mutual funds,” the SEC said.

PAG 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.

“Similarly, PAG breached its duty of care, including its duty to seek best execution, by causing advisory clients with wrap accounts to invest in fund share classes that charged 12b-1 fees when share classes of the same funds that presented a more favorable value were available at that time and by failing to undertake an analysis to determine whether the particular mutual fund share classes it selected were in the best interests of its advisory clients,” the order states.

As a result of the conduct, PAG violated Section 206(2) of the Advisers Act, the SEC said. Within 10 days of the entry of the order, Private Advisor Group must deposit $5.8 million into a fair fund that will be distributed to investors.


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