August 14, 2020

Jim Lundy Speaks with InvestmentNews and ThinkAdvisor about an SEC Settlement Involving Claims Related to 12B-1 Fees and Revenue Sharing

On Aug. 13, the Securities and Exchange Commission (SEC) ordered SCF Investment Advisors of Fresno, California, to pay $767,192 to settle allegations that it selected high-fee share classes of mutual funds and money market funds for clients without disclosing that less-expensive classes of the same funds were available, InvestmentNews and ThinkAdvisor report.

In the order, the agency said that, since January 2014, the firm recommended mutual funds that charged 12b-1 fees that were collected by its affiliated broker, SCF Securities. Regarding the second allegation, the agency said that since March 2017, the firm recommended cash sweep money market funds from its clearing broker that paid revenue sharing to the affiliated broker.

Some of the 12b-1 cases we are seeing now are “follow-ons to firms that have been under investigation for a year or two,” Lundy told ThinkAdvisor.

The Share Class Selection Initiative “is over, but the SEC will continue to bring disclosure cases,” he added.

“The newer piece is the revenue-sharing component. [They got SCF] for revenue sharing — it has to do with money market sweep funds,” Lundy explained.

“The last time the SEC brought a case even remotely on that theory was back in 2011, so this is the first case in almost a decade that goes into detail regarding revenue-sharing violations related to money market sweep funds,” he added.

Lundy told InvestmentNews, “This is the first case that goes into detail with respect to revenue sharing related to cash sweep money market funds.”

He added that advisory firms should carefully consider whether to continue recommending mutual funds with 12b-1 fees.

“The SEC Enforcement Division has effectively outlawed them,” Lundy told InvestmentNews. “Firms need to assess where they’re receiving revenue, the conflicts associated with that revenue, and make sure their disclosures are as detailed as possible.”

Read the InvestmentNews article.

Read the ThinkAdvisor article.

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