SEC orders firm to pay $1.3M for failing to disclose conflicts related to high-cost funds

SEC orders firm to pay $1.3M for failing to disclose conflicts related to high-cost funds
'If you’re an investment advisor and you’re not putting your clients in the lowest-cost share class, then you’re running the risk of a fiduciary failure,' an expert says.
OCT 11, 2023

The SEC ordered a Delaware investment advisory firm to pay $1.3 million to settle charges that it placed clients in expensive mutual fund share classes without disclosing related conflicts of interest.

In an order posted Tuesday, the Securities and Exchange Commission said Wilmington Trust Investment Management offered a wrap program between February 2020 and August 2020. The firm paid trading costs for clients in the program, including transaction fees on mutual fund investments, as part of the overall management fee, according to the SEC.

During the six months in 2020 covered in the case, Wilmington Trust did not incur transaction fees because it invested some client assets in higher-cost mutual fund share classes offered by its clearing firm that didn't charge transaction fees. But lower-cost share classes of the same funds were available to clients for a transaction fee, the SEC said.

Wilmington Trust violated its fiduciary duty by failing to provide to clients “full and fair disclosure” about the conflicts of interest related to using transaction-fee-free mutual funds in its wrap accounts while continuing to include transaction costs in the wrap fee, the SEC said. The firm also failed to obtain the best mutual fund prices for its clients by investing in the high-cost funds when less expensive shares in the same funds “presented a more favorable value for these clients.”

As part of the settlement, Wilmington Trust agreed to pay $999,559 in disgorgement, a $250,000 fine and $77,588 in interest for a total of $1,327,147. The SEC said the firm, which did not admit nor deny the SEC’s findings, took remedial efforts to address the share-class problem and cooperated with the agency on the investigation.

The action against Wilmington Trust continues a share-class crackdown the SEC launched with an initiative in 2018 that concluded in 2020. Since then, the agency has pursued enforcement against individual firms.

“If you’re an investment advisor and you’re not putting your clients in the lowest-cost share class, then you’re running the risk of a fiduciary failure,” said Niels Holch, a partner at the law firm Holch & Erickson.

Wilmington Trust said it ended its Portfolio Architect wrap-fee program in 2021 and that clients have been reimbursed for financial harm associated with the offering.

“We do not anticipate that the settlement will impact the services we provide to our clients or on the business’ financial health,” Wilmington Trust spokesperson Pat Fitzgibbons wrote in an email. “We are pleased that this matter has been resolved.”

The SEC has made no secret of its concerns regarding share-class selection. In addition to taking enforcement actions, it has made the topic an examination priority for the past couple years.

“This is a pretty obvious violation, and I’m a little surprised it’s occurring given the SEC has brought a number of these administrative proceedings with similar fact patterns,” Holch said.

Here's why boutique fund managers often beat the big guys

Latest News

JPMorgan tells fintech firms to start paying for customer data
JPMorgan tells fintech firms to start paying for customer data

The move to charge data aggregators fees totaling hundreds of millions of dollars threatens to upend business models across the industry.

FINRA snapshot shows concentration in largest firms, coastal states
FINRA snapshot shows concentration in largest firms, coastal states

The latest snapshot report reveals large firms overwhelmingly account for branches and registrants as trend of net exits from FINRA continues.

Why advisors to divorcing couples shouldn't bet on who'll stay
Why advisors to divorcing couples shouldn't bet on who'll stay

Siding with the primary contact in a marriage might make sense at first, but having both parties' interests at heart could open a better way forward.

SEC spanks closed Osaic RIA for conflicts, over-charging clients on alternatives
SEC spanks closed Osaic RIA for conflicts, over-charging clients on alternatives

With more than $13 billion in assets, American Portfolios Advisors closed last October.

William Blair taps former Raymond James executive to lead investment management business
William Blair taps former Raymond James executive to lead investment management business

Robert D. Kendall brings decades of experience, including roles at DWS Americas and a former investment unit within Morgan Stanley, as he steps into a global leadership position.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.