The Securities and Exchange Commission continues its crackdown on firms' use of more expensive Class A mutual fund shares as well as 12b-1 fees, levying recent actions against an RIA as well as SunTrust Bank's investment services subsidiary.
On Sept. 8, the SEC issued a cease-and-desist order against Envoy Advisory Inc., and the firm agreed to pay disgorgement for failing to offer the lowest-fee mutual fund share classes available and failing to adequately disclose compensation paid to its affiliated broker-dealer.
The RIA recommended third-party mutual funds to 403(b) and IRA clients, who directed the investments.
According to the SEC, from January 2013 through March 2017, Envoy recommended, and plan participants and IRA holders held, Class A mutual fund shares when less expensive institutional share classes of the same mutual funds were available.
Unlike institutional shares, Class A shares may charge investors marketing and distribution or 12b-1 fees, typically 25 basis points per year. The 12b-1 fees (also commonly known as "trail" or "trailer" fees) are paid out of the assets of the fund.
In Envoy's case, the 12b-1 fees paid by mutual funds held by plan participants and IRA holders went to Envoy's affiliated broker-dealer, Envoy Securities LLC.
During the relevant period, Envoy Securities received at least $24,800 in 12b-1 fees in connection with investments in higher-fee share classes by plan participants and IRA holders.
Envoy's Form ADV disclosures to plan sponsors during the relevant period disclosed that certain mutual funds "may" pay a "dealer" 12b-1 fees, but failed to disclose that the "dealer" receiving the 12b- 1 fees was Envoy's affiliate, according to the SEC order.
The Envoy case is "slightly different from some of the prior enforcement proceedings in the area to the extent that it did not say that the advisor breached its duty of best execution," Larry Stadulis, partner at Stradley Ronon Stevens & Young in Washington, told ThinkAdvisor on Thursday.
