Making good on its promise to continue to put 12b-1, revenue sharing and wrap fee programs under the microscope, the Securities and Exchange Commission has hit Rothschild Investment Corp. of Chicago and Paradigm Wealth Advisors of Bridgewater, N.J., with charges both firms used undisclosed investment selection practices that were often more costly to clients.
The firms have agreed to an SEC censure and to pay a total of more than $2.8 million in fines and restitution to settle the SEC charges without admitting or denying guilt.
According to the SEC, Rothschild, a dually-registered investment advisor and broker-dealer, breached its fiduciary duty to advisory clients by failing to disclose it received two types of compensation on its advisory clients’ investments. One involved 12b-1 fees that put investors in more costly investments; the other entailed revenue sharing payments from an unaffiliated clearing broker as a result of sweeping Rothschild’s advisory clients’ cash into certain money market mutual funds when lower-cost options were available to clients.
Rothschild failed to self report the 12b-1 fees to the SEC and also breached its duty to seek best execution by causing advisory clients to invest in more expensive share classes of mutual funds or share classes of cash sweep money market funds, the SEC said in the settlement.
In addition, while Rothschild determined that certain money market funds were appropriate cash sweep vehicles for its advisory clients, it failed to consider alternative funds with similar strategies that were offered by the clearing broker and had lower costs and higher yields.
Rothschild has agreed to disgorgement of $1,885,360.59, prejudgment interest of $186,306.41 and a civil penalty of $400,000.00, the SEC said.
According to the SEC, Paradigm, a registered investment advisor, maintained undisclosed investment selection practices that often put clients in higher-cost mutual funds than were otherwise available, inadequately disclosed the conflicts of interest associated with these investment selection practices, and inaccurately described the manner in which the firm calculated advisory fees for certain clients who maintained multiple accounts.
Paradigm was charged with avoiding paying transaction fees the firm would have been obligated to pay for its advisory clients by purchasing mutual fund share classes that charged 12b-1 and other fees instead of lower-cost share classes of the same funds that were available to clients. This occurred during the period from April 2016 through March 2019, according to the SEC.
“In many of the cases in which Paradigm selected more expensive mutual fund share classes, clients were eligible for lower cost institutional shares but acquiring such shares would have required Paradigm to pay a transaction fee,” the SEC said.
Paradigm did not adequately disclose this conflict of interest and breached its duty to seek best execution for these transactions because it invested clients in higher-cost mutual fund share classes when other share classes of the same funds presented a more favorable value for these clients, the SEC stated in the order.