The Securities and Exchange Commission on Thursday ordered an investment advisory firm to pay $356,580 to settle charges that it failed to disclose to clients payments from mutual funds that benefitted the firm.
In the order, the SEC alleged that from January 1, 2014, through May 31, 2019, Signature Financial Services Ltd. of Arlington Heights, Illinois, purchased, recommended or held for advisory clients mutual fund share classes that paid 12b-1 fees to the firm’s unaffiliated broker-dealer. The SEC said the firm failed to make clear to clients that lower-cost share classes of the same fund were available.
The SEC said the firm violated its fiduciary duty.
“Signature was required to provide its advisory clients with full and fair disclosure that is sufficiently specific so that they could understand the conflicts of interest concerning Signature’s and its associated persons’ advice about investing in different classes of mutual funds and could have an informed basis on which they could consent to or reject the conflicts,” the order states.
The SEC also charged the firm with a best execution violation because the less expensive shares that “presented a more favorable value” for the clients at the time of the transaction.
Signature agreed to pay $252,460.60 in disgorgement and $24,120.34 in prejudgment interest. The SEC also imposed an $80,000 fine.
Signature did not admit nor deny the SEC’s findings. A firm spokesperson was not immediately available for comment.
The SEC said Signature failed to self-report 12b-1 fee disclosure violations through its Share Class Selection Disclosure Initiative. Under that program, which concluded earlier this year, the SEC returned about $139 million to investors. Firms that participated paid restitution but avoided civil monetary penalties.
Since the end of the initiative, the SEC has been taking enforcement actions against firms that did not step forward.
“I’m surprised we’re continuing to see these cases,” said Niels Holch, executive director of the Coalition of Mutual Fund Investors.
Some recent cases that have been filed outside of the share-class initiative have included a best-execution charges, which expands the focus of the effort beyond disclosure violations.
“You need to place the client in the lowest-cost share class as part of your fiduciary responsibilities,” Holch said.
The SEC crackdown on 12b-1 fee disclosures adds more pressure to high-fee funds. Investors increasingly are shunning them in favor ETFs and index funds that don’t charge fees.
“Investor preferences are moving away from [12b-1 fee] arrangements,” Holch said.
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