A Maryland-based dual-registered broker/dealer and investment advisory firm will repay $1.5 million to investors after failing to disclose conflicts of interest about the kinds of mutual funds in which they invested client assets, according to a settlement order with the Securities and Exchange Commission revealed Tuesday.
According to the SEC order, Founders Financial Securities had approximately $1 billion in regulatory assets under management as of March 2019, with more than 10,000 client accounts. The SEC asserted that the firm invested client assets into higher-cost share class mutual funds charging more expensive 12b-1 fees when lower-cost share class alternatives for the same funds were available for investment. Founders’ status as a dual-registered investment advisor required it adhere to a fiduciary duty in service of its clients, which the SEC argued the firm failed to do.
“To meet this obligation, Founders was required to provide its advisory clients with sufficient information so that they could understand Founders’ conflicts of interest concerning the firm’s advice about investing in the different classes of mutual funds and have a basis on which they could consent to or reject such conflicted transactions,” the order read.
According to the SEC, Founders also didn’t disclose that it would receive additional compensation as a result of investing in the higher-cost share class mutual funds on its Forms ADV to the SEC, and also didn’t note that it was selecting these types of funds for investment when there were lower-cost share classes for the same fund. Additionally, the SEC criticized Founders for not having procedures in place to direct advisors toward the most affordable, available investment options.
The order comes a day after 16 firms were directed to return a cumulative $10 million to clients for similarly investing in more expensive share class mutual funds when there were affordable options available, while simultaneously failing to disclose this conflict to the SEC and investors. These firms self-reported their disclosure failures as a part of the SEC’s Share Class Selection Disclosure Initiative, a way to avoid more significant financial penalties. The SEC order pertaining to Founders revealed that the firm was not eligible for self-reporting because the SEC had contacted Founders about its violation before the initiative was announced in February 2018.
