Some 79 of the nation’s most prominent broker-dealers are happy to be past the SEC’s share class settlement ordering them to pay $125 million in investor restitution for failing to disclose to investors that they had sold them more expensive shares when less expensive shares were available.
But while the SEC’s settlement flags firms’ lack of disclosure of the conflicted sales, it does nothing to punish the actual sales of pricier fund shares themselves, which one long-time fiduciary advocate said is “flagrantly illegal conduct.”
“The sales are clear breaches of the fiduciary duty to act in the best interest of clients,” said Knut Rostad, a longtime fiduciary advocate and founder and president of The Institute for the Fiduciary Standard.
“There is no question the firms know – or should know -- this conduct is as illegal as ordinary street crime. Yet, the SEC treats and describes the conduct as a minor traffic infraction,” Rostad said.
The firms neither denied nor admitted guilt as part of the settlement, but self-reported the conflict of interest transgressions and agreed to change practices as part of the voluntary SEC program that allowed them to forego enforcement actions, fines and penalties. Firms named in the settlement include: LPL Financial, Raymond James, Wells Fargo, Ameritas, Deutsche Bank and Oppenheimer.
According to the SEC. “The advisors placed their clients in mutual fund share classes that charged 12b-1 fees – which are recurring fees deducted from the fund’s assets – when lower-cost share classes of the same fund were available to their clients without adequately disclosing that the higher cost share class would be selected.”
Countered Rostad: “According to the SEC view, the infraction was inadequately disclosing a conflict of interest. This “logic” seems to mean that if this conflict were “adequately” disclosed, there would be no infraction. The underlying act of breaching fiduciary duties, in this case, would not matter. That it would be okay to disclose in hidden small print: ‘Mrs and Mr. Smith, we are charging you funds with pricey 12b-1 (marketing) fees, when there are less expensive shares of this mutual fund.’
“The message to the industry is: ‘Don’t worry about fiduciary breaches. Disclosure cures all. Coddling is in. Real enforcement and deterrence are out,’” the fiduciary advocate said.
According to Rostad, the SEC hand slap of a clear-cut breach of the fiduciary standard “is part of longer-term campaign by the SEC to weaken the fiduciary standard for the brokerage industry and to show that there is no difference between the brokerage and advisor industry.”
In fact, actual registered investment advisors would not have had access to 12b-1 shares of a mutual fund—only registered reps or dually-registered advisors that work with a broker-dealer would, a fact that Rostad said the SEC does not mention.