State Securities Regulators Fine Firm for Overcharging Investors on Mutual Funds

A broker-dealer/investment adviser settled charges brought by 14 state securities regulators for overcharging investors on mutual funds. The regulators alleged that the investors paid sales charges on mutual funds that were then shifted into fee-based advisory accounts. 

The state regulators, coordinated among members of the North American Securities Administrators Association ("NASAA"), claimed that nationwide, customers were overcharged more than $10 million in redundant fees.

According to one Consent Order by the Arkansas Securities Commissioner, the firm failed to fully offset the front-end sales charges (up to 5 percent of the investment value) previously paid by clients who purchased Class A mutual fund shares which later transitioned to advisory accounts. The Commissioner said that, despite providing a prorated offset of these fees for two years, the firm retained significant amounts from these initial sales charges. The Commissioner said that the issue impacted customers who incurred ongoing advisory fees of 0.5 percent to 1.35 percent annually.

To settle the charges in the Arkansas case, the firm agreed to (i) pay an administrative fine of $320,754.72 to the Arkansas Securities Department, (ii) cover $15,000 in administrative and investigatory costs and (iii) enhance its internal supervisory and compliance procedures to prevent future violations. 

In an accompanying release, NASAA reported that overall, the firm agreed to $17 million in settlement fines with the states. NASAA said that the firm will pay each of the 50 states, Washington, DC, the US Virgin Islands and Puerto Rico an administrative fine of approximately $320,000.