Pruco Securities LLC, a dually registered investment advisor and broker-dealer in Newark, N.J., agreed to settle charges that it breached its fiduciary duty to its advisory clients in the firm's wrap fee programs, the Securities and Exchange Commission announced today.
The firm will pay more than $18 million to be placed in a fund to be distributed to its harmed clients.
Pruco Securities is a wholly owned subsidiary of the Prudential Insurance Company of America, which in turn is an indirect wholly owned subsidiary of Prudential Financial Inc.
Pruco provides investment advisory services and programs as an SEC-registered investment advisor under the marketing name Prudential Financial Planning Services. It’s also an SEC-registered broker-dealer offering brokerage services and selling variable life insurance, variable annuities, mutual funds, 529 college savings plans and general securities.
According to the SEC's order, Pruco acted contrary to its disclosures when it failed to monitor client accounts to determine whether the wrap fee programs continued to be suitable for clients and miscalculated the advisory fees it charged clients.
In addition, the regulator said, Pruco received revenue sharing from both bank deposit cash sweep vehicles and mutual funds it recommended to clients, and avoided paying transaction fees by investing clients in no-transaction-fee mutual funds.
The SEC order further stated that Pruco didn’t disclose these conflicts of interest to its clients and that Pruco received 12b-1 fees from certain mutual funds recommended to clients. The order finds that while Pruco updated its Form ADV brochure in June 2014 to disclose the conflict regarding its receipt of 12b-1 fees, it failed to identify the new disclosure as a material change to the brochure until March 2016.
Because of that, the SEC said, legacy clients weren’t told about the conflict until that time. The order further finds that Pruco violated its duty to seek best execution by causing certain advisory clients to invest in certain mutual funds that charged higher expenses when lower-priced share classes of the same funds were available to clients.
The SEC order finds that Pruco willfully violated Sections 206(2) and 206(4), as well as Rule 206(4)-7 of the Investment Advisers Act of 1940.
Pruco, which neither admitted nor denied the SEC’s findings, consented to a cease-and-desist order, a censure and to pay disgorgement of $12,690,585, prejudgment interest of $3,061,786 and a civil penalty of $2,500,000. This all goes into a fund for distribution to harmed clients.
The SEC's investigation was conducted by Stephen B. Holden with assistance from John Farinacci, and was supervised by Corey Schuster, all from the Enforcement Division's Asset Management Unit.