The SEC charged three affiliated firms of American International Group, Inc. with disclosure- and compliance-related violations of the Investment Advisers Act. The firms failed to disclose that certain mutual fund share classes were eligible for fee rebates and failed to monitor accounts to ensure that fees remained in the best interests of their clients (In the Matter of Royal Alliance Associates, Inc., SagePoint Financial, Inc., and FSC Securities Corporation, Release No. 34-77362, March 14, 2016).
Fee classes conflict of interest. AIG indirectly owns Royal Alliance Associates, Inc., SagePoint Financial, Inc., and FSC Securities Corporation (“affiliate firms”), which are part of AIG’s network of independent, dual-registered broker-dealers and investment advisers in the U.S.
Certain retail advisory clients were eligible for the affiliate firms’ Advisor Managed Portfolio (AMP) program, which offered a wide selection of mutual funds across multiple share classes of the same funds, including a share class that rebated marketing and distribution fees (12b-1 fees). According to the SEC, the affiliate firms invested some advisory clients in mutual fund share classes with 12b-1 fees instead of the lower-fee share classes of the same fund. The firms had an incentive to place non-qualified advisory clients in the higher-fee mutual fund share classes, the SEC alleged, noting that between 2012 and 2014, the affiliate firms received approximately $2 million in 12b-1 fees they would not have otherwise collected. Failure to disclose this conflict of interest on their Forms ADV was a breach of their fiduciary duties, according to the SEC.
Failure to monitor inactive accounts. The SEC also alleged that, although the affiliate firms’ own compliance policies and procedures required them to monitor the level of trading activity for inactivity and “reverse churning” (where a client is charged a wrap fee covering all advisory services and costs even though the client trades infrequently), SEC staff found during examinations of the affiliate firms that there had been lapses of up to 18 months between inactive account reviews. The affiliate firms ended up refunding over $700,000 to nearly 1,400 advisory clients following the examinations.
Sanctions. The SEC charged the affiliate firms with violating the Advisers Act provisions and rules relating to fraud, compliance policies, and misleading statements. To settle the charges, and without admitting or denying the SEC’s findings, the firms agreed to disgorge over $2 million in improper fees plus prejudgment interest. The firms also agreed to pay a $7.5 million penalty, to be censured, and to cease and desist from future violations. The order requires the firm to retain an independent compliance consultant to review the firms’ compliance policies and make recommendations. The order noted that the firms had taken remedial acts and had cooperated with SEC staff during its investigation.
The release is No. 34-77362.
Companies: Royal Alliance Associates, Inc.; SagePoint Financial, Inc.; FSC Securities Corporation; American International Group, Inc.
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