SEC orders hybrid to return nearly $1.5 million over share-class violations
Clients of Founders Financial paid 12b-1 fees when eligible for lower-cost shares
The Securities and Exchange Commission has ordered Founders Financial Securities, a Towson, Md.-based hybrid, to distribute $1,475,465 to harmed investors as part of a settlement involving the sale of inappropriate mutual fund share classes.
[More: SEC continues to see problems with advisers selecting too-expensive share classes]
The payment, part of a settlement with the agency, stems from the firm having invested clients in more expensive mutual fund share classes, which provided the firm with financial benefits, without disclosing this conflict to clients. The settlement includes a distribution to harmed investors.
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The SEC’s order finds that Maryland-based Founders purchased, recommended or held for advisory clients mutual fund share classes that charged 12b-1 fees instead of available lower-cost share classes of the same funds for which the clients were eligible. Those 12b-1 fees were then passed on to Founders, or used to offset amounts due from Founders for the cost of client custody services. This practice created a conflict of interest that the firm did not adequately disclose to clients. In addition, the order finds that Founders breached its duty to seek best execution for its clients by investing them in mutual fund share classes with 12b-1 fees rather than available lower-cost share classes of the same funds. According to the SEC’s order, Founders also failed to adopt and implement written policies and procedures designed to prevent these violations.
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The SEC’s order also finds that Founders violated the antifraud provisions of Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder. Without admitting or denying the SEC’s findings, Founders will pay disgorgement of $1,246,133, prejudgment interest of $229,332, and a civil penalty of $140,000. Founders has agreed to distribute $1,475,465 to harmed investors. Founders also consented to a censure and the entry of a cease-and-desist order from committing or causing further violations of these provisions of the federal securities laws.
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