The Securities and Exchange Commission said on Monday it had reached an agreement with 1st Global Advisors Inc., now known as Avantax Advisory Services Inc., to pay a $16.9 million penalty over not revealing conflicts stemming from marketing fees paid by clients for mutual funds that charge what is commonly referred to in the industry as 12b-1 fees.
Avantax is the wealth management business for Blucora Inc., a tax management and preparation software company that for the past several years has been expanding into the red hot wealth management space and buying broker-dealers that focus on CPAs. In 2019, Blucora acquired 1st Global, an independent broker-dealer that focuses on taxes and CPAs, for $180 million in stock.
In 2018, the SEC launched its Share Class Disclosure Initiative. At the time, the agency said it was targeting advisers who have failed to disclose to clients that they have received revenue-sharing payments, or 12b-1 fees, to sell the funds. If advisers reported themselves, the agency would not impose a civil monetary penalty but would require advisers to return gains to clients.
In settling the 1st Global matter with the SEC, Avantax agreed to return to investors approximately $12.4 million of revenue 1st Global received prior to being acquired in 2019 resulting from 12b-1 fees, certain no-transaction fee mutual funds and money-market cash-sweep products as well as an additional $2.5 million of interest, according to a statement from the company.
Avantax also agreed to pay a civil monetary penalty of $2 million to address 1st Global’s disclosure failures between 2014 and 2019. Avantax has consented to the settlement without admitting or denying the findings set forth in the SEC’s Order.
"We were aware of the SEC’s Share Class Disclosure Initiative prior to acquiring 1st Global and booked a reserve related to a portion of this matter when the acquisition was completed," said Todd Mackay, president of Avantax Wealth Management, in a statement. "While we are disappointed that the SEC demanded a penalty based on conduct that occurred prior to our ownership of 1st Global, we are nonetheless pleased to have worked closely with the SEC to resolve this matter."
According to Avantax, with close to 3,500 financial advisers, the SEC has found more than 100 firms offering advisory services failed to properly disclose compensation in connection with 12b-1 fees and some mutual fund share classes.
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