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SEC Penalizes Investment Firm for Revenue Sharing and 12b-1 Fee Disclosure

The headquarters building of the United States Securities and Exchange Commission (SEC) is in Washington, DC, United States

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The Securities and Exchange Commission ordered a registered investment adviser and broker-dealer to pay more than $800,000 for alleged failures to properly disclose conflicts of interest related to revenue sharing and certain fund fees.

The regulatory action builds on the SEC’s efforts to review companies’ disclosures to clients about revenue-sharing payments and 12b-1 fees, which mutual funds pay advisors on an ongoing basis for expenses. distribution and marketing. In recent years, the agency has imposed monetary penalties on registered investment advisers for disclosure failures. It is not against the rules to invest clients in expensive funds, but the SEC has investigated whether advisers notify clients when there is a lower-cost class of stock available that does not charge a 12b- 1.

In its latest action, the SEC said May 31 that Madison Avenue Securities had breached its fiduciary duty to disclose conflicts of interest over several years. The agency criticized disclosures by Madison Avenue Securities regarding revenue-sharing payments it received from an unaffiliated clearing broker following the swiping of client money in certain mutual funds of the money market. The SEC said Madison Avenue Securities’ clearing broker shares a portion of the revenue it receives when Madison Avenue invests clients in certain money market funds.

The firm reportedly recommended and placed clients’ uninvested cash into money market fund options for which it received revenue-sharing payments even though there were other money market funds available that would have sometimes paid out higher returns to customers, but for which Madison would have received less or no revenue sharing, according to the SEC.

The SEC also said Madison Avenue Securities failed to properly disclose 12b-1 fees it received on certain funds from February 2016 to April 2018.

The firm allegedly advised clients to buy and hold share classes of mutual funds that charged 12b-1 fees even if lower-cost share classes of those same funds were available, according to the SEC . Madison collected nearly $17,000 in 12b-1 fees that she would not have collected had her clients invested in lower-cost available share classes of those funds, the regulator’s order says.

The agency said Madison Avenue Securities was eligible to self-report 12b-1 issues to the SEC as part of a recent disclosure initiative, but did not. In 2019, dozens of investment firms self-reported violations under the SEC initiative and agreed to refund more than $125 million to their clients.

Finally, the regulator criticized Madison Avenue Securities for allegedly breaching its duty to seek best execution by investing advising clients in mutual fund share classes when cheaper share classes of the same funds were available.

San Diego-based Madison Avenue Securities has been registered as an investment adviser since 2009 and a broker-dealer since 2005, according to the SEC. The company had approximately $1.77 billion in assets under management as of March 14. A company representative could not be reached for immediate comment.

Write to Andrew Welsch at [email protected]