Three independent broker-dealers formerly operating under the umbrella of the
AIG Advisor Group have been fined $7.5 million by the Securities and Exchange Commission and ordered to pay restitution of $2 million to clients for persistent failures to use lower-cost mutual funds in clients' advisory accounts.
The settlement arises from “breaches of fiduciary duty and multiple compliance failures” by Royal Alliance Associates Inc., SagePoint Financial Inc. and FSC Securities Corp., according to the SEC order, which was issued on Monday.
“From at least 2012 to 2014 [the three broker-dealers] invested advisory clients in mutual fund share classes with 12b-1 fees instead of lower-fee share classes of the same funds that were available without 12b-1 fees,” according to the order. A 12b-1 fee is an annual marketing fee paid to advisers that is supposed to be earmarked for the adviser's ongoing service and education.
As a result, the firms collected approximately $2 million in 12b-1 fees that they would not have seen had they invested those advisory clients in available and lower-fee share classes, according to the order.
The three firms also failed to disclose the conflict of interest due to a financial incentive to place clients with non-retirement accounts in higher-fee mutual fund share classes.
In January, American International Group
announced the sale of AIG Advisor Group, one of the largest networks of independent broker-dealers in the country, to private-equity firm Lightyear Capital and Canadian pension manager PSP Investments. The transaction is expected to close by mid-year.
“Advisor Group is pleased to have reached a settlement with the SEC over two issues it raised that occurred between 2012 and 2014 at three of our affiliates, FSC Securities, Royal Alliance and SagePoint Financial,” wrote spokeswoman Linda Malamut in an email. A Lightyear spokesman, Elliot Sloane, also did not return a call for comment.
“During the relevant period, Advisor Group firms failed to devote sufficient resources to their compliance infrastructure to support their investment advisory business,”
according to the order. “As a result several compliance failures at Advisor Group firms in their fee-based advisory businesses contributed to the violations.”
