SEC Penalizes Investment Firm Over Revenue Sharing, 12b-1 Fee Disclosures
The Securities and Exchange Commission ordered a registered investment advisor and broker-dealer to pay more than $800,000 over alleged failures to properly disclose conflicts of interest related to revenue sharing and certain fund fees.
The regulatory action builds on the SEC’s efforts to scrutinize firms’ disclosures to clients about revenue sharing payments and 12b-1 fees, which mutual funds pay to advisors on an ongoing basis for distribution and marketing expenses. The agency has in recent years imposed monetary penalties on registered investment advisors for disclosure lapses. It’s not against the rules to invest clients in expensive funds, but the SEC has examined whether advisors are telling clients when there is a lower-cost share class available that does not charge a 12b-1 fee.
In its latest action, the SEC said May 31 that Madison Avenue Securities had breached its fiduciary duty with regard to disclosing conflicts of interest over several years. The agency criticized Madison Avenue Securities’ disclosures with regard to revenue sharing payments it received from an unaffiliated clearing broker as a result of sweeping customer cash into certain money market mutual funds. The SEC said that Madison Avenue Securities’ clearing broker shared a portion of the revenue it received when Madison Avenue invested clients in certain money market funds.
The firm allegedly recommended and put clients’ uninvested cash in money market fund options for which it received revenue sharing payments even though there were other money market funds available that at times would have paid clients higher yields, but for which Madison would have received less or no revenue sharing, according to the SEC.
The SEC also said Madison Avenue Securities did not properly disclose 12b-1 fees it received on certain funds from February 2016 to April 2018.
The firm allegedly advised clients to purchase and hold mutual fund share classes that charged 12b-1 fees even though lower-cost share classes of those same funds were available, according to the SEC. Madison netted nearly $17,000 in 12b-1 fees that it would not have collected had its clients been invested in available lower-cost share classes of those funds, the regulator’s order states.
The agency said Madison Avenue Securities was eligible to self-report the 12b-1 issues to the SEC under a recent disclosure initiative but failed to do so. In 2019, dozens of investment firms self-reported violations under the SEC initiative and agreed to reimburse more than $125 million to clients.
Finally, the regulator criticized Madison Avenue Securities for allegedly breaching its duty to seek best execution by investing advisory clients in mutual fund share classes when less expensive share classes of the same funds were available.
Headquartered in San Diego, Madison Avenue Securities has been registered as an investment adviser since 2009 and a broker-dealer since 2005, according to the SEC. The firm had approximately $1.77 billion in assets under management as of March 14. A representative of the company could not be reached for immediate comment.
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