RIA Hit With $5.8M SEC Penalty for 12b-1 Fee Infractions Tied to Wrap Accounts

Since at least July 2014, PAG and its IARs avoided incurring transaction fees for wrap client transactions by investing certain clients’ assets in mutual fund share classes from a no-transaction fee program offered by its clearing firm, the SEC order states.

Some of the mutual fund share classes charged 12b-1 fees when lower-cost share classes of the same fund were available to clients through the clearing firm for a transaction fee. “Although PAG and its IARs did not receive any of these 12b-1 fees, by investing clients in NTF share classes, PAG and its IARs avoided paying transaction fees on client trades of these mutual funds,” the SEC said.

PAG failed to provide full and fair disclosure to clients concerning its use of mutual fund share classes offered through the NTF program in wrap accounts and its associated conflicts of interest, the SEC said.

“Similarly, PAG breached its duty of care, including its duty to seek best execution, by causing advisory clients with wrap accounts to invest in fund share classes that charged 12b-1 fees when share classes of the same funds that presented a more favorable value were available at that time and by failing to undertake an analysis to determine whether the particular mutual fund share classes it selected were in the best interests of its advisory clients,” the order states.

As a result of the conduct, PAG violated Section 206(2) of the Advisers Act, the SEC said. Within 10 days of the entry of the order, Private Advisor Group must deposit $5.8 million into a fair fund that will be distributed to investors.