The Securities and Exchange Commission today announced charges against three AIG affiliates for steering mutual fund clients toward more expensive share classes so the firms could collect more fees. The firms agreed to pay more than $9.5 million to settle the SEC’s charges.
An SEC investigation found that the firms placed clients in share classes that charged fees for marketing and distribution despite the clients being eligible to buy shares in fund classes without those additional charges. As a result, the firms collected approximately $2 million in extra fees. The firms failed to disclose their conflict of interest in selecting share classes that would generate more revenue for them.
“Investment advisers must be vigilant about conflicts of interest when selecting mutual fund share classes because the choice may improperly benefit them at the expense of their clients,” said Marshall S. Sprung, Co-Chief of the SEC Enforcement Division’s Asset Management Unit, which has been actively probing conflicts of interest and disclosure around mutual fund share class selection.
According to the SEC’s order instituting a settled administrative proceeding, the AIG affiliates also failed to monitor advisory accounts on a quarterly basis to prevent reverse churning. The firms had compliance policies and procedures to ensure that fee-based or “wrap” advisory accounts that charged an inclusive fee for both advisory services and trading costs remained in the best interest of clients that traded infrequently, but failed to implement those policies and procedures.
The three firms – Royal Alliance Associates, SagePoint Financial, and FSC Securities Corporation – consented to the SEC’s order without admitting or denying the findings that they violated Sections 206(2), 206(4) and 207 of the Investment Advisers Act of 1940 and Rule 206(4)-7. The firms agreed to disgorgement of more than $2 million in improper fees plus prejudgment interest and a $7.5 million penalty.
The SEC’s investigation was conducted by John Farinacci and supervised by Panayiota K. Bougiamas of the Asset Management Unit. The SEC examination that led to the investigation was conducted by Joseph P. DiMaria, Edward R. Perkins, John Camardo, and Mary Beth Lynch of the New York Regional Office as well as Jon M. Wieman and Sang Lee of the Los Angeles Regional Office.