SEC Charges Advisors with 12b-1 Violations

The Securities and Exchange Commission has struck a deal with two investment advisory firms that allegedly “selected mutual fund share classes inconsistent with their disclosures to clients.”

The SEC says the firms and the CEO of one of the firms will collectively pay more than $1.8 million, which will be returned to harmed investors.

According to the SEC’s orders, American Portfolios Advisers Inc., PPS Advisors Inc., and PPS’ Chief Executive Officer and Chief Investment Officer, Lawrence Nicholas Passaretti, invested advisory clients in mutual fund share classes that paid 12b-1 fees to the firms’ investment adviser representatives (IARs), even though less expensive share classes of the same funds were available.

According to a press release, the orders find that American Portfolios and PPS failed to disclose conflicts of interest, violated their duty to seek best execution, and failed to implement policies and procedures designed to prevent violations of federal securities laws in connection with their mutual fund share class selection practices. In particular, in disclosures to clients, American Portfolios incorrectly stated that its IARs either did not receive 12b-1 fees or only selected the more expensive share classes when less expensive share classes of the same fund were unavailable, while PPS incorrectly stated that it selected higher-cost share classes for the “long-term benefit” of clients and only where less expensive share classes of the same fund were unavailable.

Without admitting or denying the findings, American Portfolios, PPS, and Passaretti consented to cease-and-desist orders, and American Portfolios and PPS consented to censures. American Portfolios agreed to pay $895,353 in disgorgement and prejudgment interest and a civil penalty of $250,000. PPS and Passaretti agreed to pay $631,746 in disgorgement and prejudgment interest and a civil penalty of $75,000.

The SEC notes that the firms were not eligible to self-report pursuant to the Division of Enforcement’s Share Class Selection Disclosure Initiative announced in February because the Division contacted them about the disclosure violations before the initiative was announced.

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