An investment advisor in Pennsylvania has been sued by the SEC for allegedly reaping thousands of dollars in profits by unnecessarily steering its clients into expensive mutual funds.

The agency filed a civil complaint in U.S. District Court in Philadelphia yesterday against Ambassador Advisors LLC of Lancaster, Pa., along with its principals, Bernard I. Bostwick, Robert E. Kauffman, and Adrian E. Young, that alleges they breached their fiduciary duties and committed fraud through their mutual fund share class selection practices.

From August 2014 to December 2018, the complaint states, the firm and its principals failed to disclose to clients the conflicts of interest arising from the fund selection process—namely, that the firm profited from 12b-1 fees charged to its clients that could have easily been avoided.

In one example cited by the complaint, advisory clients of Ambassador ended up paying $60,000 in 12b-1 fees in 2014 when the firm placed them in MFS Global Alternative Stategy Fund CLass A shares, even though a lower-cost share class was available that would have only charged a one-time $15 fee for each purchase.

The SEC noted in the complaint that, unlike lower-cost funds that charge a one-time fee, 12b-1 fees are charged throughout the life of the fund investment and are deducted on an ongoing basis from the mutual fund’s assets, with much of the money usually ending up going to the broker who sold the fund.

Bostwick, Kauffman, and Young entered into an agreement with their broker, which was not identified in the complaint, to receive 95% of the 12b-1 fee revenue derived from their clients' fund investments, the SEC said.

"[The defendants] invested their advisory clients in mutual fund share classes that charged 12b-1 fees when lower-cost share classes of the same funds were available to the clients," the complaint stated. "As a result, clients received a lower return on their investment, and Bostwick, Kauffman, and Young received additional compensation in the form of 12b-1 fee revenue."

Ambassador also failed to adopt and implement written policies and procedures designed to prevent these violations, the SEC said.

During the period of the alleged violations, Ambassador Advisors reported that it had regulatory assets under management ranging from about $270.6 million to $489.6 million, and that it advised between 2,600 and 4,300 client accounts, mostly belonging to individuals, the SEC said in the complaint. The firm has been registered with the SEC as an investment advisor since 2002.

Bostwick, the company president, owns 50% of the company and is a resident of Lancaster, the complaint said.

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