Broker-Dealer Settles Reg BI Violations over Share Class Recommendations
Commentary by Steven Lofchie
A broker-dealer settled SEC charges for failing to comply with Regulation Best Interest ("Reg BI") in connection with recommendations to retail brokerage customers purchasing mutual fund shares in their IRAs.
According to the Order, the broker-dealer made recommendations that led customers to invest in higher-cost share classes of affiliated mutual funds through a pre-selected core menu, despite the availability of lower-cost share classes. The SEC found that the broker-dealer (i) failed to accurately disclose that more expensive share classes were not the only option and omitted information about substantially equivalent, lower-cost share classes of affiliated funds, (ii) failed to disclose its conflict of interest and (iii) failed to exercise reasonable diligence and skill to understand the potential risks, rewards and costs associated with its recommendations.
The SEC found that the broker-dealer violated SEA Rule 15l-1 ("Reg. BI").
To settle the charges, the firm agreed to (i) a censure, (ii) pay over $1 million in disgorgement and prejudgment interest and (iii) pay a civil monetary penalty in the amount of $1,250,000.
Commentary
Improper sales of higher cost shares in mutual funds runs second only to recordkeeping as measured by the number of enforcement actions that the SEC brings. This is an area where firms are best advised to review their procedures.