Advisers Fined for Steering Clients to Higher-Fee Funds

Investment Management Update

Date: March 31, 2016

On March 14, 2016, three dually registered investment advisers/broker-dealers agreed to a settlement with the Securities and Exchange Commission (SEC) over allegations that they breached a fiduciary duty by investing their advisory clients in fund share classes with 12b-1 fees rather than lower-fee share classes of the same funds that were available to the clients without 12b-1 fees.  By investing clients’ assets in the higher-fee share classes, the advisers, in their capacity as broker-dealers, received approximately $2 million in 12b-1 fees.

In addition to breaching their fiduciary duty, the advisers failed to properly disclose in their Forms ADV that they had a conflict of interest due to the financial incentive (in the form of 12b-1 fees) they would collect by investing their clients in higher-fee share classes when lower-fee share classes were available.

Under the terms of the settlement with the SEC, the advisers agreed to pay $9.5 million in fines.


To meet its fiduciary obligations, an adviser should periodically review the share classes offered by funds to determine if a client is invested in the lowest-fee share class appropriate for that client. The adviser should also review its Form ADV disclosure and compliance practices to ensure that any conflicts of interest that exist with respect to clients’ investments in mutual funds are properly disclosed and addressed. Such conflicts may include the use of proprietary mutual funds, receipt of 12b-1 fees or other financial incentives.


For more information, please contact:

Andrew J. Davalla

Donald S. Mendelsohn

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