Advisor Group firm’s settlement pushes regulatory payouts over $18M
Advisor Group’s FSC Securities has paid the network’s largest regulatory settlement in at least two years after agreeing to a $5.7 million payout in connection with a fired and barred former advisor.
Barry G. Hartman sold his clients unsuitable products, as well as private securities that became worthless when a financial firm he beneficially owned closed its doors, according to the Montana Securities Department. Hartman and the firm, Invizeon, later filed for Chapter 7 bankruptcy protection.
Atlanta-based FSC’s payout represents the biggest by Advisor Group since a $9.5 million settlement with the SEC in 2016 over mutual fund fees. Advisor Group also paid almost $1.7 million in December to settle a FINRA mutual-fund case, and its legal payments since 2016 have amounted to more than $18.1 million.
The largest independent broker-dealer, LPL Financial, disclosed regulatory and compliance expenses of $21 million in 2017, and wirehouses pay greater amounts each year. However, FSC’s settlement with Montana regulators requires the IBD to pay restitution plus interest, as well as a fine and other fees.
“This guy did stuff he shouldn’t have been doing,” Advisor Group CEO Jamie Price said in an interview in late April. “It’s 100% resolved, and I think Montana did the job that they’re required to do to protect the people in their state.”
Efforts to reach Hartman, 70, were not successful, and one lawyer who later represented Hartman and Invizeon in bankruptcy proceedings didn’t respond to requests for comment. Another lawyer who represented Hartman before FINRA declined to comment.
The Feb. 15 consent agreement with Montana regulators covers the waiving or repayment of surrender penalties attached to $2.7 million in unsuitable annuities, $1.4 million in rescission plus interest for other unsuitable investments and $1.3 million in restitution plus interest for Invizeon investors, according to the state agency.
Jamie Price doesn’t expect the firm's advisors to have any problem with a new standard after taking steps to comply with the more restrictive DOL rule.
The Advisor Group IBD added three new teams, but state regulators required enhanced oversight of one new recruit.
The two IBDs have agreed to pay restitution in one of the largest securities fraud cases in the advisor’s home state.
FSC had cited Hartman’s “participation in an undisclosed outside business activity and an undisclosed private securities transaction” as the reason for his March 2015 termination, FINRA BrokerCheck shows. FINRA barred him from the industry five months later, noting similar allegations.
Missoula-based Hartman filed for bankruptcy protection in October 2015, but a bankruptcy judge discharged his nearly $1.4 million in unpaid liabilities three months later. Invizeon’s proceeding remains pending, with the shuttered firm reporting almost $9.9 million in liabilities in a January 2017 filing.
The firm’s bankruptcy application lists it as a finance or insurance firm. Reports from clients, FSC’s Form U5 termination filing and several arbitration cases resulted in the investigation by Montana regulators into Invizeon and Hartman, says Deputy Securities Commissioner Lynne Egan.
“The positions were not held at FSC Securities,” Egan says. “If your money seems to be leaving the firm and going elsewhere, it could be a red flag.”
Egan declines to state further details about the Invizeon offering or any possible criminal referral of Hartman’s case. A spokeswoman for the U.S. Attorney’s Office in Montana said she could not confirm or discuss any criminal investigations.
The SEC had alleged in March 2016 that FSC and fellow Advisor Group IBDs Royal Alliance Associates and SagePoint Financial steered mutual fund clients to higher-cost share classes. In a similar case earlier this year, the SEC accused Ameriprise in March of overcharging mutual fund clients by about $1.8 million.
Both the SEC and FINRA have made share-class selection a major enforcement priority, and the SEC has brought cases against 13 firms since 2016, according to the agency. FINRA has sanctioned more than 35 firms since 2015, with total restitution of nearly $80 million, the self-regulatory body says.
The four Advisor Group IBDs agreed with FINRA to pay total fines of $400,000 and restitution of $1.3 million in December. Like the other firms, FINRA had accused Advisor Group of not providing sales-charge waivers for eligible retirement plan and charitable clients.
The compliance team of Phoenix-based Advisor Group completed a full review of client accounts to determine which clients had been entitled to the break on fees but hadn’t received them, Price says. Some mutual funds allow a charity that’s part of a household to receive the waiver, while others do not, he notes.
Any time the client “would have been in a better position in the same product set than we structurally allowed, we were all for that,” Price says.
The four firms also agreed to a $550,000 payment last May after FINRA said they failed to calculate and set aside the correct amount of net capital. In addition, FSC paid more than $492,000 in restitution and a $100,000 fine in August to resolve FINRA’s investigation of its supervision of leveraged and inverse ETFs.