U.S. Bancorp Investments, a dually registered investment adviser and broker-dealer, has agreed to pay $16 million to settle Securities and Exchange Commission charges for breaches of fiduciary duty arising out of its mutual fund share-class selection practices.
The SEC administrative proceeding alleges that, from October 2012 through November 2017, U.S. Bancorp Investments (USBI) “purchased, recommended, and held for advisory clients mutual fund share classes that charged 12b-1 fees and shareholder servicing fees instead of lower-cost share classes of the same funds which were available to the clients. USBI failed to adequately disclose a conflict of interest related to these fees to its clients.” In doing so, the SEC alleges USBI “violated its duty to seek best execution for those transactions.”
The administrative proceeding further alleges USBI “failed to adopt and implement written compliance policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder related to its mutual fund share class selection practices.” As a result, USBI willfully violated Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-7, which require a registered investment adviser to adopt and implement written compliance policies and procedures reasonably designed to prevent violations of the Advisers Act.
In determining to accept the offer, the SEC said it considered remedial acts promptly undertaken by USBI, as well as its cooperation efforts. “Starting in February 2016, USBI began rebating 12b-1 fees to all clients. In December 2017, USBI initiated the process of converting existing mutual fund investments in NTF Class A shares (or comparable classes) held by its advisory clients to the lowest-cost share classes available for the same funds on the Clearing Firm’s platform, subject to eligibility restrictions imposed by the funds,” according to the administrative proceeding.
Similar enforcement action
If the details of this proceeding sound familiar, that’s because 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 last month. In that complaint, the SEC alleged that, from August 2014 to December 2018, Ambassador Advisors, along with Bernard Bostwick, Robert Kauffman, and chief compliance officer Adrian Young—part owners, executives, and investment adviser representatives of the firm—“unlawfully invested their advisory clients in mutual fund share classes with 12b-1 fees when lower-cost mutual fund share classes were available to the clients.”