Three American International Group advisory firms have settled federal civil charges that they levied unnecessary fees on at least 1,000 mutual fund clients, the Securities and Exchange Commission says.
The dually registered broker-dealer and investment advisory firms — Royal Alliance Associates, SagePoint Financial and FSC Securities Corp. — are required by law to act in the best interests of their clients. Instead, the SEC asserted Monday, the advisors acted negligently by steering customers into higher-fee fund share classes and keeping them in accounts with gratuitous "wrap fees," which cover trading charges even when a client's trading is minimal.
"Investment advisers must be vigilant about conflicts of interest when selecting mutual fund share classes because the choice may improperly benefit them at the expense of their clients," Marshall S. Sprung, co-chief of the SEC Enforcement Division's asset management unit, said in a statement.
Specifically, the SEC said the firms sold clients mutual fund share classes that included what are called 12b–1 fees — marketing charges that benefit the advisor or broker who sells the fund — even when cheaper share classes were available. As a result, the SEC said, the firms collected about $2 million in superfluous fees.
The firms were also found to have engaged in "reverse churning": overcharging clients who trade infrequently by sticking them in accounts with inclusive wrap fees that cover trading costs and advisory services. Since the clients in question were trading infrequently, they would have been better off in lower-fee advisory-only accounts — just paying for trading costs a la carte — or in simple brokerage accounts with no advisory fees, the SEC charged.
As a result, the three businesses will pay the SEC a total of $9.5 million to settle the charges. That's in addition to more than $1 million in refunds the firms have already paid to clients who fell victim to reverse churning, according to the SEC.Under the settlement in the civil case, AIG did not admit or deny wrongdoing.
"We cooperated with the SEC's investigation while working to enhance the processes at issue," AIG spokesman Jon Diat wrote in an email. "Advisor Group takes compliance with securities regulations seriously and remains focused on serving the best interests of our clients."
The firms in question represent three out of the four broker-dealers in AIG's Advisor Group network.
The fourth business, Woodbury Financial Services, recently paid about $200,000 in fines and restitutions after sanctions by the Financial Industry Regulatory Authority for levying customers with excessive sales charges.
AIG recently announced a plan to spin off several units, including the Advisor Group arm, partly in response to the Labor Department's proposed fiduciary rule, which will tighten standards around the sale of retirement products.
The sale — to Lightyear Capital LLC and PSP Investments — is scheduled to close in the second quarter of 2016.