BMO Harris, 17 other firms settle with SEC over share class selection — more will follow
Two BMO Harris Bank retail advisory entities joined the expanding list of firms that have faced enforcement actions this year under the SEC’s push for greater share-class disclosure.
In all, the regulator charged 18 more firms — 16 of which self-reported in its share class initiative — with failure to adequately disclose conflicts of interest from mutual fund selection.
More cases are in the pipeline, according to Brian Rubin, an attorney at Eversheds Sutherland whose firm has represented clients in the self-reporting initiative. Rubin says that there are other firms currently being investigated by the SEC over both 12b-1 fee and revenue sharing disclosures, but did not specify the number or the status of the inquiries.
Even as some firms and broker-dealer groups accuse the SEC of “regulating without rules” in its share-class disclosure program, the enforcement cases are mounting. Since March, nearly 100 firms have settled with the SEC by agreeing to pay a combined $173 million over cases involving disclosure of share class selection conflicts. At least two cases are still pending against Cetera and Commonwealth.
“[These actions] demonstrate the Commission’s commitment to holding advisors accountable for selecting more expensive investments that eat away at their clients’ investment returns without proper disclosure,” Dabney O’Riordan, co-chief of the SEC’s Asset Management Unit, said in a statement after the latest batch. The regulator said it had settled with an additional 16 RIAs, many of which are corporate entities for broker-dealers. It is the second wave of self-reporting settlements since the first one involving 79 firms in March.
The SEC also recently settled with BMO Harris Financial Advisors and BMO Asset Management for $37 million over the regulator’s case alleging failure to disclose both improper share class selection and concentration of proprietary funds in retail client portfolios.
The regulator has also settled with Mid Atlantic Capital’s RIA after it allegedly failed to disclose conflicts around recommending higher-cost share between 2013 and 2018. While the firm was eligible for the self-reporting initiative, it did not participate, and will pay a $300,000 civil penalty in addition to $1 million in disgorgement and prejudgment interest, according to the SEC.
The 16 self-reporting firms collectively paid approximately $10 million in disgorgement and prejudgement interest, according to the SEC. But they weren’t required to pay civil penalties. As self-reporting firms, they were given an omnibus order from the SEC, which states that, despite the charges against them, the regulator will waive certain disqualifications.
“What normally happens is that each firm would have to petition the Commision for a waiver,” says the attorney, Rubin.
BMO Harris agreed to pay $29.7 million in disgorgement and prejudgment interest and nearly $8.3 million in civil penalties to the SEC. The company failed to tell clients that about half of the assets in its Managed Asset Allocation Program, the bank and broker-dealer’s main retail advisory platform, were invested in proprietary funds from its own asset management arm, according to the SEC order. The firm also did not disclose to clients related conflicts of interest, the order states.
Even though there were cheaper share class alternatives available, BMO Harris placed MAAP clients in high-cost, non-institutional shares of either its proprietary mutual funds or others where it received revenue sharing payments and avoided certain transaction costs, “while clients received lower returns on these investments,” the SEC states.
“These BMO advisors repeatedly put their own financial interests ahead of clients by giving preference to their own mutual funds or selecting higher-cost share classes,” O’Riordan said in a statement. “This is important information for an advisor to tell clients as it goes to the heart of the advisor-client relationship and will impact the clients’ returns.”
Spokespersons at Mid Atlantic and BMO Harris did not respond to a request for comment. Neither company admitted to or denied the allegations, according to the SEC orders.