SEC Fines Another Broker-Dealer/Investment Adviser for Recommending More Expensive Share Classes
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January 14, 2020 TO: ICI MembersChief Compliance Officer Committee
Compliance Advisory Committee SUBJECTS: Investment Advisers
Litigation & Enforcement RE: SEC Fines Another Broker-Dealer/Investment Adviser for Recommending More Expensive Share Classes
The Securities and Exchange Commission has announced that it recently settled an administrative proceeding with another broker-dealer/investment adviser registrant for violating the antifraud provisions of the Securities Act in connection with the offer and sale of mutual fund shares to certain retail retirement account and charitable organization brokerage customers.[1] In particular, the Respondent was found to have failed to provide shares charge waivers to these customers by recommending and selling more expensive mutual fund share classes to them. As a result of these violations, the Respondent was censured, ordered to cease and desist, fined $1,500,000, and ordered to disgorge $251,083 along with prejudgment interest of $71,355. In assessing these sanctions, the Commission considered the remedial acts “promptly undertaken” by the Respondent when it discovered the violations, including that the Respondent voluntarily identified and converted eligible customers into a lower price share class and also repaid eligible customers, including customers outside the relevant period.[2]
According to the Order, the Respondent’s violations resulted from it not having adequate systems and controls in place to determine whether customers were eligible to purchase load-waived Class A shares. As a result, the Respondent failed to provide available sales charge waivers in at least 58,000 transactions involving approximately 16,734 customers. The Respondent also failed to disclose to customers that: (1) the Respondent would earn more revenue if the customer purchased a share class other than the load-waived Class A shares that the customer was eligible to buy; and (2) purchase of other share classes would negatively impact the customer’s overall investment returns. The SEC found that this conduct constituted a violation of the antifraud provisions (i.e., Sections 17(a)(2) and (a)(3)) of the Securities Act.
Tamara K. Salmon
Associate General Counsel
endnotes
[1] See In the Matter of J.P. Morgan Securities, LLC, Respondent, SEC Release No. 33-10741 (January 9, 2020) (the “Order”), which is available at: https://www.sec.gov/litigation/admin/2020/33-10741.pdf. A press release announcing the settlement is available at: https://www.sec.gov/enforce/33-10741-s.
[2] According to the Order, the Respondent’s reimbursement payments totaled $7,296,085 for transactions during the applicable statutory limitation period (June 2012 through December 2015) and $8,736,110 for transactions prior to that period (i.e., for transactions from January 2010 until June 2012). The Respondent also converted all eligible customers holding Class B and Class C shares to Class A shares at no cost to the customers.