SEC penalizes RIA more than $2 million for 12b-1 violations

Pennsylvania advisory firm invested client funds in expensive share classes when less costly ones were available

Sep 14, 2018 @ 2:16 pm

By Mark Schoeff Jr.

A Pennsylvania investment advisory firm on Friday agreed to pay $2.1 million in a settlement with the Securities and Exchange Commission over sales of high-fee mutual fund share classes.

In the order, the SEC alleged that from April 2013 through March 2016, Capital Analysts LLC, which is based in Fort Washington, Pa., invested client funds in mutual fund share classes with 12b-1 fees in its wrap fee program when share classes without the fees were available in the same fund.

The agency also alleged that from April 2013 through March 2017, the firm failed to disclose to its clients that its broker-dealer, Lincoln Investment Planning, received service fee revenue from a clearing broker when Capital Analysts invested client assets in certain funds that did not pay 12b-1 fees.

Capital Analysts agreed to return $936,181 to investors for the best-execution violation involving 12b-1 fees along with $113,692 in pre-judgment interest. It will return $691,125 to investors and pay $79,351 in prejudgment interest related to the failure to disclose Lincoln's third-party compensation.

In addition, the SEC levied a $300,000 fine on Capital Analysts.

Earlier this year, the SEC encouraged investment advisers to report themselves if they inappropriately recommended high-fee share classes. Under that program, which ended in June, advisers would have to repay clients but would not be fined.

A spokeswoman for Capital Analysts was not immediately available for comment.

The SEC has made share-class violations an enforcement priority, asserting that they constitute a breach of advisers' fiduciary duty.

"When an advisory client in a fee-based program is eligible for a non-12b-1 fee share class, it generally is in the client's best interest to invest in this share class rather than a 12b-1 fee share class of the same fund because the clients' returns will not be reduced by 12b-1 fees," the SEC order states.


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