Two advisors will pay penalties totalling more than $1 million under an agreement with the SEC to settle charges that they placed clients into unnecessarily expensive fund share classes and failed to disclose conflicts of interest.
The advisors, Kathryn Jane Meredith and John Paul Harnish, served as operators of KM Advisory Services (KMA) in Victor, N.Y., which received mutual fund fees and commissions without fully disclosing conflicts of interest from 1994 through Dec. 2020, the SEC said. From at least Jan. 2016, the firm also invested most of its clients’ assets in mutual funds that paid 12b-1 fees and charged sales load commissions exclusively through an introducing broker-dealer, with whom Meredit, KMA’s founder, was a registered representative, the SEC said.
“As a result, KMA’s clients paid 12b-1 fees and commissions to the introducing broker-dealer, a portion of which were shared with KMA,” the SEC said. “KMA failed to fully and adequately disclose this arrangement and conflicts of interest arising therefrom. KMA also breached its duty of care by not routinely comparing the introducing broker-dealer’s order execution with other broker-dealers, which KMA’s advisory relationship with its clients require.”
Had KMA done so, the SEC said, the firm’s clients might have been able to invest at more favorable rates, considering the introducing broker-dealer provided only retail class shares to KMA clients while keeping I class shares and load-waived shares for its own advisory clients.
Meredith, 78, of Palmetto, Fla., could not be reached by press time. She grew the financial planning and investment advisory business she founded in 1994 to the point where, in Feb. 2020, she had 216 clients with more than $167 million in assets, according to the SEC.
For the share class and other compliance violations through Feb. 2020, Meredith will pay $574,744 in disgorgement, $77,252 in prejudgment interest and $100,000 in a civil money penalty, the filings said.
In Feb. 2020, Meredith sold her practice to Harnish, who had worked with KMA from 2004 as its director of financial planning and chief compliance officer, the filings said. As of March 2020, the firm had grown to 177 clients with more than $172 million in assets, according to the firm’s most recent Form ADV.
The SEC filings stated that from the firm’s purchase in Feb. 2020 through December of that year, Harnish continued to run the firm as it had been run under Meredith. In Oct. 2020, Harnish started moving clients from KMA to his own advisory firm, Prosperity Advisory Group, according to BrokerCheck. Its most recent Form ADV from March 2021 noted 243 clients and assets under management over $218 million.
According to the SEC, Harnish undertook a series of steps to correct KMA’s disclosure documents and to evaluate which clients should move to a different mutual fund share class, and this was taken into consideration by the agency.
For violations spanning February to December 2020, Harnish will pay $220,097 in disgorgement, $5,550 in prejudgment interest and a civil money penalty of $75,000, the SEC said.