NPB Financial Group, a dually registered investment adviser and broker-dealer, has reached a $1 million settlement with the Securities and Exchange Commission to settle charges for breaches of fiduciary duty arising out of its mutual fund share-class selection practices and receipt of 12b-1 fees.
The SEC administrative proceeding alleges that, from January 2014 through March 2019, NPB “purchased, recommended, or held for advisory clients mutual fund share classes that charged 12b-1 fees, including when lower-cost share classes of the same funds were available to the clients.” While NPB and its associated persons received 12b-1 fees for these investments, it didn’t disclose this practice or the conflict of interest, even though “NPB was eligible to self-report to the Commission,” the SEC said.
The SEC also said NPB “failed to adopt and implement written compliance policies and procedures reasonably designed to prevent violations of the Advisers Act” relating to its mutual fund share class selection practices. For these reasons, the SEC’s order finds that NPB violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7.
NPB did not admit or deny the findings. However, it consented to a cease-and-desist order, a censure, disgorgement of $532,519, prejudgment interest of $92,668, and a civil penalty of $425,000. It also agreed to distribute funds to harmed clients and retain an independent compliance consultant within 30 days of the issuance of Thursday’s proceeding.
Further, NPB must provide the SEC with a certificate certifying its compliance enhancements and agreed to the potential for future requests regarding evidence of compliance.
Enforcement trend
NPB is not the only firm to have faced SEC charges for its mutual fund share-class selection practices of late. In June, U.S. Bancorp Investments reached a $16 million settlement with the SEC for similar breaches. And in May, Ambassador Advisors, a registered investment adviser, and its principals—including its chief compliance officer—were charged by the SEC with breaches of fiduciary duty arising out of its mutual fund share-class selection practices.
Also, in 2019, the SEC settled charges against 17 investment advisory firms for disclosure failures regarding their mutual fund share class selection practices. The firms included 16 advisers that self-reported as part of the Division of Enforcement’s Share Class Selection Disclosure Initiative and were, thus, not required to pay civil penalties. One adviser that did not self-report was ordered to pay a $300,000 civil penalty.
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