Private Advisor Group to Pay $5.8M to Settle SEC Mutual Fund Charges

The Securities and Exchange Commission has settled charges with a large registered investment advisor involving excess fees billed to clients, the latest action in a long-running crackdown on how advisors handle mutual fund share classes.

Securities and Exchange Commission headquarters


Zach Gibson/Bloomberg

Morristown, N.J.-based Private Advisor Group, which manages around $34 billion in client assets, has agreed to pay $5.8 million to resolve allegations that its advisors invested client funds in classes of mutual funds that carried 12b-1 fees “when share classes of the same funds that presented a more favorable value were available at that time,” the SEC said in its order instituting cease-and-desist proceedings against PAG.

PAG said it is “pleased to put this matter behind us,” but described the conduct alleged in SEC’s order in the past tense, referring to “certain historic practices” that it phased out in 2017 with a new policy “requiring the purchase of the lowest share class available.”

The enforcement action comes as the latest sanction the SEC has handed down to an advisory firm for placing clients in pricey share classes of mutual funds and failing to disclose related conflicts of interest.

The commission has been very public in its condemnation of the practice, and for a time ran a self-reporting program where companies were invited to come forward and acknowledge they had been overcharging clients for mutual funds and take corrective action in exchange for lenient enforcement penalties.

It’s not just the SEC that’s on the case. Last month, industry regulator Finra ordered Merrill Lynch to pay $15.2 million to settle charges it had been overcharging clients for mutual fund share classes.

In the case of PAG, the firm’s advisors were not collecting the 12b-1 fees; instead the clearing firm that facilitated the transaction collected them. A spokeswoman for PAG said the firm considered itself ineligible for the SEC’s self-reporting initiative because it was not the party that received the fees.

The incentives for PAG advisors in this matter are a bit convoluted. PAG’s compensation structure deducted non-12b-1 mutual fund transaction fees from advisors’ compensation. Share classes with lower 12b-1 fees—which would be paid by clients—had transaction fees attached, which would be debited from the advisors’ compensation. So by placing clients in share classes with no transaction fees, advisors avoided taking a hit themselves, but the clients ended up paying more in 12b-1 fees, when lower-cost shares were available.

That all amounted to a breach of the advisors’ fiduciary duty and a failure to disclose material conflicts of interest, the SEC determined.

“PAG did not provide full and fair disclosure to clients concerning its use of mutual fund share classes offered through the [no-transaction fee] program in wrap accounts and its associated conflicts of interest,” the commission 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.”

Further, the SEC said that during the period of the conduct from 2014 to 2016, PAG did not have in place sufficient policies and procedures to ensure that clients were placed in the most advantageous shares of mutual funds.

In late 2016, PAG announced to its advisor reps that starting Jan. 1, 2017, they would no longer be allowed to purchase mutual funds with 12b-1 fees for wrap-account clients, giving them until the end of that year to convert clients’ assets to non-12b-1 share classes.

“While these changes, when implemented, began to mitigate the conflict of interest, they did not eliminate it and the conflict was never disclosed to clients,” the SEC said.

PAG contends that the change it made in 2017 remains “an industry-leading policy,” and said that the money it’s paying through the settlement will almost entirely be distributed to clients whose accounts date to the period prior to that update.

“Because the policy was updated in 2017, we expect the vast majority of the settlement amount that will be credited to clients to cover the period of July 2014 to December 2016,” PAG said. “To highlight the historical nature of this issue, less than 4% of our current accounts will receive a credit of more than $100.”

Write to advisor.editors@barrons.com

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