SEC Cites 9 Brokerage Firms Over 12b-1 Fee Violations That Harmed Customers

Attorney Advising Disclaimer

As the Securities and Exchange Commission moves to scrutinize and potentially reduce or maybe even eliminate fees paid from mutual fund or exchange-traded fund assets to cover marketing and selling costs—effectively a sales or distribution fee charged to investors—the SEC continues to crack down on advisory firms it says have abused their 12b-1 fee collections by not disclosing the conflicted situation to their clients and in some cases being influenced by the 12b-1 fees.

Several firms, such as Voya Financial or Centaurus Financial, are repeat offenders.

The SEC penalized the following firms for various fee-related misconduct:

1) Voya Financial Advisors leads off with a $22.9 million payment to settle charges that it failed to disclose 12b-1 fees charged to investors at its firm. The SEC's December 2020 order cites the firm for misleading statements, inadequate disclosures, and recommendations that may have been unsuitable because the firm steered clients to money market funds that earned the firm undisclosed revenue-sharing payments. Some of the higher fees advisory clients incurred came via upfront commissions when purchasing illiquid alternative investments when waivers were available.

2) Kestra Financial agreed to pay a total of $10 million, with Kestra Private Wealth Services chipping in for its share of alleged misconduct after the SEC accused Kestra for failing to disclose broker-dealer compensation, charges, commissions, or fees received when investing investor assets in specific mutual funds. The July 2021 cease-and-desist order states that Kestra's supervisory policies were deficient and that Kestra Advisory Services breached its duty to its clients by failing to provide full and fair disclosure regarding compensation and fees.

3) JW Cole Advisors (aka Jonathan Roberts Advisor Group)'s mutual fund share selection practices allegedly resulted in unaffiliated JW Cole Financial Inc receiving improper 12b-1 fees. The firm's breaches of fiduciary duty, according to investigators, resulted in clients receiving unsuitable recommendations of higher-cost mutual fund share class options that paid the firm and/or its representatives more money, without the firm disclosing this conflict of interest. The SEC's August 2021 order directs JW Cole Advisors to pay $1.95 million over its mutual fund share class selection practices.

4) Centaurus Financial's $1.2 million inadequate disclosure order found that the California-based Centaurus made misleading statements to investors regarding 12b-1 fees and failed to disclose the conflict of interest to clients.

5) Northwest Advisors' penalty of disgorgement and civil fines exceeds $1.1 million and pertains to the unsuitable recommendation of mutual fund share classes that charged 12b-1 fees when lower-cost share classes of the same funds (that did not charge 12b-1 fees) were available to its clients.

6) Educators Financial drew a nearly $800,000 penalty for billing practice violations pertaining to mutual fund share class selections. At the heart of the matter is that regulators accused Educators Financial of steering investors to funds that charged 12b-1 fees. The August 2021 order cites Educators Financial Services for failing to apply its advisory fee schedule properly, resulting in client overcharges, for mutual fund share class selection violations relative to 12b-1 fees, and for failing to refund prepaid advisory fees when clients terminated an account.

7) ISC Advisors' $716,345 penalty came after an SEC investigation that determined the firm recommended mutual fund share classes that paid 12b-1 fees to its affiliated broker-dealer, Institutional Securities Corporation, when lower-cost shares were available and potentially more suitable for clients.

8) Bolton Securities agreed to pay $450,000 to settle allegations that it failed to disclose to clients material conflicts of interest related to mutual fund 12b-1 fees and similar investment-related compensation it generated. The court signed off on a final consent judgment against Bolton Securities Corporation dba Bolton Global Asset Management in February 2021.

9) CapWealth Advisors and its principal Timothy J Pagliara remain the target of an SEC complaint alleging the firm failed to adequately disclose conflicts of interest related to 12b-1 fee-bearing mutual fund share classes instead of lower-cost share classes. The SEC claims that Pagliara instructed the broker-dealer to send 12b-1 fees to accounts at CapWealth's holding company, of which Pagliara is majority owner. The complaint alleges Pagliara received compensation for this and also received 12b-1 fees from his clients' mutual fund investments.

The SEC's investigation of these firms reflects a widespread problem pertaining to mutual fund share-class recommendations, and this doesn't include a handful of brokerage firms sanctioned by the self-regulatory organization FINRA. For instance, FINRA in January 2021 reached agreement with Transamerica Financial for the firm to pay $8.8 million to settle charges it failed to reasonably supervise representatives' variable annuity and mutual fund recommendations, including mutual fund share class recommendations that may have been unsuitable.

The financial harm for this brand of misconduct can be significant. For instance, FINRA's $8.8 million agreement with Transamerica includes $4.4 million in damages to customers.

If you invested with any of the SEC's sanctioned firms or with any broker, investment adviser, or representative who unsuitably recommended mutual fund share classes that were unsuitable for you—such as those that generated 12b-1 fees, excessive commissions, or other unnecessary costs—or that ended up losing value when better, lower-cost, and more appropriate alternatives were available, please call an experienced FINRA arbitration attorney at The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.

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