SEC Settles Charges against Advisory Firms for Breach of Fiduciary Duty and Compliance Violations

The SEC settled charges with three fee-based advisory firms for allegedly steering mutual fund clients toward more expensive share classes in order to collect larger fees.

The SEC Order found that the firms:

• invested non-qualified advisory clients in higher-fee share classes in order to receive approximately $2 million in fees authorized by Section 12b-1 of the Investment Company Act ("12b-1 fees") that they otherwise would not have collected from the lower-fee share classes;

• failed to disclose a conflict of interest due to a financial incentive to place non-qualified advisory clients in higher-fee mutual fund share classes in their Forms ADV, which the SEC asserted constituted a breach of fiduciary duty as investment advisers; and

• failed to monitor advisory accounts quarterly for inactivity, or so-called "reverse churning," to ensure that "wrap" advisory accounts remained in the best interests of clients that traded infrequently.

The three firm advisories agreed to disgorge more than $2 million in improper fees, plus prejudgment interest, and to pay a $7.5 million penalty.