Massachusetts Secretary of the Commonwealth William Galvin charged brokerage Janney Montgomery Scott with churning high-fee mutual funds, a signal of continued regulatory interest in share-class violations.
In a
complaint filed Tuesday, Mr. Galvin brought the action against Janney over sales of Class A share mutual funds by a former firm broker, Stephen Querzoli, between June 2012 and November 2018. Those transactions generated approximately $192,055.21 in commissions and fees.
Mr. Querzoli would sell the Class A shares to purchase other Class A shares within short time periods — sometimes just a couple months — to boost his commissions, according to the complaint.
The state is seeking an order for Janney to pay restitution to Mr. Querzoli's harmed clients and to impose a fine on the firm. It also is seeking to force Janney to hire an independent consultant to review its policies and procedures related to short-term trading of Class A shares.
"Janney takes its regulatory and client obligations seriously," the firm said in a statement. "We are aware of the complaint and will address the allegations filed by the Massachusetts Securities Division."
An enforcement action regarding Class A shares is unusual because the fee is taken right off the top, according to James Langston, president of Fiduciary Integrity, an investor advocacy firm.
"That is an outlier," Mr. Langston said. "You don't often have investment advisers churning A shares because the fees are transparent. It's surprising it went on as long as it did. That's a huge red flag somebody should have caught."
The complaint asserts A shares are typically held for three to five years because they come with high front-end loads and lower annual expenses. If a customer is going to hold a mutual fund for a short time, a C share is better because it has a lower front-end charge and higher annual expenses.
Janney opened an investigation into Mr. Querzoli's trading practices in August 2015 due to his high volume of trading activity, according to the complaint. He ignored a suggestion from his branch manager to consider purchasing more C shares for his customers, and the investigation was closed in June 2016 with no further action.
"From the time of his discussion with his branch manager on or around November 23, 2015, through his termination in November 2018, [Mr.] Querzoli executed 193 more trades involving Class A shares in four customers' accounts," the complaint states. "During that same time period, he executed only three purchases of Class C shares in the four customers' accounts combined."
The Massachusetts case is another example of regulators cracking down on the sale of inappropriate share classes. The SEC recently
announced settlements with 79 firms for failing to disclose the receipt of fees for selling certain share classes when less expensive classes were available in the same fund.
Finra has launched a self-reporting initiative
involving 529 college savings plan share classes.
"There has been an increasing wave of everyone looking at compensation," said Alex Russell, managing director of securities litigation and regulatory enforcement at Bates Group, a compliance and legal consultant. "The signal it sends to financial services firms is that they need to take a close look at their policies, procedures and supervisory systems."
Regulators will continue to bring cases over share-class violations because of the perceived success they're achieving, according to Mr. Russell.
"They're not going to stop looking in this area until it stops working," he said. "It gives them something they can point to that serves their core objective of protecting retail investors."
