The SEC penalized the firm because fees related to mutual fund investments allegedly represented a conflict of interest.
SunTrust Investment Services (STIS), the investment services subsidiary of SunTrust Banks, an American bank holding company, has agreed to pay a penalty of more than $1.1 million to settle the SEC’s charges that it “collected more than $1.1 million in avoidable fees from clients by improperly recommending more expensive share classes of various mutual funds when cheaper shares of the same funds were available.”
Collecting those fees, which took place between at least December 27, 2011 and approximately June 30, 2015, represented a conflict of interest, the SEC says, noting that more than 4,500 accounts were affected.
Specifically, STIS investment adviser representatives (IARs) “purchased, recommended, or held ‘Investor class’ or ‘Class A’ mutual fund shares for advisory clients when less-expensive ‘Institutional class’ or ‘Class I’ shares of the same mutual funds were available,” the SEC says.
While SunTrust neither admits nor denies the SEC’s findings, it has agreed to pay the penalty totaling $1,148,071.77, “as well as disgorgement plus interest on any leftover amount of the avoidable 12b-1 fees that are being refunded to clients.”
The firm has also agreed to be censured, the SEC points out.
“SunTrust began refunding the overcharged fees plus interest to affected clients after the SEC started its investigation,” the commission notes. “SEC examiners cited the practice during a compliance review of the firm in mid-2015.”
SunTrust “breached its fiduciary duty to act in clients’ best interests by recommending and purchasing costlier mutual fund share classes that charge a type of marketing and distribution fee known as 12b-1 fees,” according to the SEC’s order. “Investors were not informed that they were eligible for less costly share class options that did not charge 12b-1 fees. The avoidable fees flowed back to SunTrust in the form of higher commissions from the funds.”
The 12b-1 fees are allowed under a provision of the Investment Company Act of 1940 that “permits funds to compensate brokers and other financial intermediaries out of fund assets for services they provide shareholders related to the distribution of fund shares,” according to the Investment Company Institute (ICI), which was established in 1940 in New York as the National Committee of Investment Companies, according to an ICI history posted on its website.
“A significant difference between Class A shares and Class I shares is that Class A shares often carry ongoing marketing and distribution fees imposed pursuant to Section 12(b) of the Investment Company Act of 1940 and Rule 12b-1 thereunder (‘12b-1 fees’),” the SEC says.
“The 12b-1 fees are paid by a mutual fund out of fund assets and passed back through as compensation to STIS by the fund’s distributor,” according to the SEC. “STIS then shares a portion of the 12b-1 fees with its IARs who are also registered representatives of the firm. For Class A shares, these 12b-1 fees are typically as much as 25 basis points per year for an advisory client. The affected STIS clients held either discretionary or non-discretionary wrap fee investment accounts offered through certain STIS advisory programs. These programs offered clients varying investment options, including numerous mutual funds with both Class A shares and lower-cost Class I shares.”
During the relevant 2011-2015 period, “STIS and its IARs received at least $1,148,071.77 in avoidable 12b-1 fees paid by the funds in which the advisory clients were invested. These 12b-1 fees (also known as ‘trailing’ fees or ‘trailers’) decreased the value of the advisory clients’ investments in the mutual funds and increased the compensation paid to STIS and its IARs.”
“STIS did not adequately inform its advisory clients of the conflicts of interest presented by its IARs’ share class selections and the receipt by STIS and the IARs of 12b-1 fees,” according to the SEC. “STIS disclosed in … brochures for its investment advisory programs that STIS ‘may’ receive 12b-1 fees as a result of investments in certain mutual funds and – for several STIS programs – that such fees presented a ‘conflict of interest.’ However, STIS did not disclose in its … brochures or otherwise that many mutual funds offered a variety of share classes, including some that did not charge 12b-1 fees and were, accordingly, less expensive.”
“SunTrust made self-serving investment recommendations to the detriment of everyday investors who rely on mutual funds to secure their financial futures,” Aaron W. Lipson, associate regional director for enforcement in the SEC’s Atlanta office, says in a statement. “The story has a happy ending for customers with the extra fees back in their accounts, and an obvious lesson for investment advisory representatives that you must always recommend the best deal for your clients, not yourselves.”
Contacted for comment by FTF News, a SunTrust spokesperson offered the following statement: “We addressed the matter on a prospective basis with remedial actions starting in the summer of 2015. Although we believe that our disclosures were in accordance with industry standards, we cooperated fully with the SEC and are pleased to have settled this matter
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