A Securities and Exchange Commission investigation into mutual fund marketing fees, and costs related to investor lawsuits, could cost Berthel Fisher & Co. Financial Services Inc., a mid-sized broker-dealer known for selling alternative investments, as much as $2.5 million, according to a recent filing with the SEC.
The firm is facing up to $600,000 in costs related to disgorgement or giving back mutual fund 12b-1 fees; that potential cost stems from an ongoing investigation by the SEC into whether it breached its fiduciary duty regarding the fees, the firm said in its annual audited financial statement known as a Focus report for 2019. Although Berthel Fisher filed the report at the start of March it did not become publicly available until recently on the SEC's website.
The SEC launched its Share Class Selection Disclosure Initiative in February 2018 to target advisory firms that recommended high-fee mutual funds — those that charged 12b-1 fees kept by the firms — without telling clients that less expensive share classes were available in the same funds. It has reached settlements with firms since then.
Berthel Fisher "intends to vigorously defend itself against the legal actions brought against" it, the company said in the Focus report.
Meanwhile, the company has also set aside $1.86 million under "accounts payable" for potential damages or legal costs related to litigation and arbitration proceedings, according to the filing. It does not identify any specific investment product at the center of those legal complaints in the filing, but notes it has insurance of about $1 million to cover those claims.
Berthel Fisher has faced investor complaints and penalties by regulators in the past. Alternative investments may pay brokers and advisers higher commissions than plain vanilla investments like indexed mutual funds.
A year ago, Finra arbitrators awarded six investors $1.16 million in a case in which they alleged Berthel Fisher sold them inappropriate complex investments. In 2018, Finra censured Berthel Fisher and fined it $675,000 over sales of nontraded real estate investment trusts, nontraditional exchange-traded funds and other alternative investments.
In a statement, the company said it declined to comment on ongoing investigations by regulators or legal matters in general, but would be studying this week's U.S. Supreme Court decision involving the SEC that "imposed limitations on certain types of relief the SEC can seek."
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