Avantax is settling charges with the SEC that 1st Global Advisors recommended high-cost mutual fund share classes to classes without disclosing that it generated revenue from the fees.
Avantax will pay a total of nearly $17 million to settle the case. The firm will return $12.4 million to investors in revenue generated from 12b-1 fees, certain no-transaction fee mutual funds and money market cash sweep products, as well as $2 million in interest and another $2 million penalty.
Avantax agreed to the settlement without admitting or denying the charges.
The settlement is part of the SEC's ongoing initiative around share class disclosures. While
“It’s not surprising to me that [the SEC] would bring this case, or that they would look for penalties that would be more than what a firm would ordinarily have paid if they were participating in the [self-reporting] intiativiate,” said Jennifer Klass, a partner at law firm Baker McKenzie who focuses on investment advisor regulation.
Since January 2014, 1st Global purchased for or recommended to clients mutual fund share classes that charged 12b-1 fees when lower-cost share classes of those same funds were available, according to the SEC. 1st Global’s affiliated broker received these fees without “fully or fairly” disclosing this to clients, the SEC alleges.
The SEC also claims 1st Global recommended no-transaction fee mutual funds and cash sweep products that generated additional revenue for the firm’s broker. The fact that the SEC included these shows the regulator is looking more broadly at indirect compensation, Klass said.
“It’s not limiting its focus to just 12b-1 fees, which was the primary revenue they were looking at in the early days,” she said.
Blucora
“While we are disappointed that the SEC demanded a penalty based on conduct that occurred prior to our ownership of 1st Global, we are nonetheless pleased to have worked closely with the SEC to resolve this matter,” Mackay said.
The firm declined additional comment.
