MassMutual’s IBD settles case as industry awaits the SEC’s next move

As wealth management braces for the Biden administration to ramp up enforcement, one of the largest firms agreed to settle an SEC case with its second million-dollar payment.

MML Investors Services, the broker-dealer and RIA owned by insurer MassMutual, breached its fiduciary duty by failing to adequately disclose the conflicts of interest of third-party revenue sharing payments from its clearing firm and violating clients’ right to best execution with respect to the price of their mutual fund share classes, according to the SEC’s Sept. 10 order. MML agreed to pay more than $2.1 million in disgorgement and penalties after crediting back another $2.5 million to clients in connection with other revenue sharing, the settlement states. Like in similar cases, the compliance problem stems from the fact that revenue sharing can often come with higher expense ratios on mutual funds and the extent that clients are aware of the conflict.

The agreement covers conduct dating back to 2015 at MML and MSI Financial Services, the wealth manager that MassMutual purchased in 2016 as part of its $165-million acquisition of MetLife’s U.S. retail advisor force. In recent years, the SEC has alleged that more than 100 wealth managers didn’t adequately disclose their conflicts of interest relating to mutual funds and payments from third parties. Fiduciary advocates are expressing hope that President Biden’s SEC under Chair Gary Gensler could require firms to eliminate or at least mitigate such conflicts more substantially rather than simply disclosing them. In the case of MML, the regulator offered an explanation of how both its disclosure and overall practices have changed.

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Form ADV brochures filed by the firm starting in January 2020 reflect that MML “will periodically review the universe of share classes that it offers and recommend only one share class that MML believes offers the most favorable expenses,” the settlement states. “When, as a result of this periodic review, MML determines that a more favorable share class is available, MML will convert any holders of more expensive share classes to the more favorable share class.”

MassMutual’s wealth manager accepted the settlement without admitting or denying the SEC’s findings. At $1.24 billion in annual revenue, MML is the No. 8 firm in Financial Planning’s IBD Elite rankings. The firm credited back the earlier $2.5 million to clients during the SEC investigation for revenue sharing between October 2018 and December 2019, in addition to hiring an outside compliance consultant for a review, the settlement shows.

“MML Investors Services takes this matter very seriously and cooperated fully with the SEC,” MassMutual spokeswoman Paula Tremblay said in a statement. “Similar to other industry participants, we have reimbursed impacted accounts and are pleased to have resolved this matter.”

The case came as the industry awaits the next move from Gensler’s SEC. The regulator provided a hint about its possible plans with the appointment late last month of Barbara Roper, the longtime director of investor protection at the Consumer Federation of America, as a senior advisor to Gensler. The SEC could add more enforcement teeth to its Regulation Best Interest or write a new regulation replacing the Trump administration rule.

Under Gensler’s team, the SEC and FINRA are moving away from the emphasis on disclosing conflicts of interest, Christine Lazaro, director of the St. John’s University School of Law’s Securities Arbitration Clinic, said in a panel held by the Institute for the Fiduciary Standard last week. The regulator “has not always enforced its rules in a way that is consistent with true fiduciary principles,” Lazaro said.

“The SEC is beginning to acknowledge that, if it is going to consider an investment advisor to be a fiduciary, it must expect more from them,” Lazaro said. “I expect we're going to see the SEC shift its focus from an expectation of disclosure to an expectation of adherence to fiduciary principles that is putting the investors' interests first and not simply informing them when the advisor hasn't.”