A dually registered investment firm with about $1.17 billion in managed assets settled charges last week with the Securities and Exchange Commission over claims the firm recommended mutual fund share classes to clients that included higher fees not disclosed to clients.
Crown Capital Securities, which is based in Orange, Calif., has been registered with the SEC as a broker/dealer since 1972. The firm provides “investment services” as well as “financial planning and consulting services” to both individuals and corporations, according to the SEC’s settlement order.
In addition to failing to alert clients, Crown did not self-report the undisclosed 12b-1 fees during the SEC’s Share Class Selection Disclosure Initiative, which encouraged firms to self-report undisclosed fees in exchange for less onerous penalties, according to the commission. The program ran in 2018, and the final settlements under the initiative were announced last year.
Mutual funds often offer different types of “share classes” that may have similar investment objectives but differ in their fee structure; particularly, some share classes include 12b-1 fees that cover “certain costs of fund distribution and sometimes shareholder services,” according to the order—including ongoing fees paid to financial advisors that sold the funds. But many mutual funds offer share classes without such fees, meaning there is often a more affordable option available for clients to achieve mostly identical aims.
Since at least 2014, Crown recommended mutual fund share classes with 12b-1 fees for clients, even when the more affordable options were available, according to the commission.
“As a result, Crown and its representatives received 12b-1 fees that they would not have collected had Crown’s advisory clients been invested in the available lower-cost share classes of those funds,” the order read.
While the commission acknowledged that Crown’s Form ADV included some information about additional compensation, it believed it did not go far enough. Particularly, the SEC argued the firm didn’t specify the conflicts that would arise by investing advisory clients in a share class with 12b-1 fees while affordable options were available. Starting in October 2019, the firm began moving clients from share classes that had 12b-1 fees into share classes that did not, completing the process by January 2020.
Representatives from Crown did not return requests to comment.
Additionally, the commission found Crown earned a percentage of revenue its clearing broker made from no-transaction fee (NTF) programs, which offered Crown access to certain mutual funds. The revenue from these NTF programs was indirectly paid by clients, but Crown failed to disclose this agreement, according to the commission. The firm also allegedly invested in cash sweep money market funds that generated profits for Crown (and often resulted in higher fees for clients), without informing clients about the conflict.
Since closing the final settlements with firms that self-disclosed during the amnesty period, the commission has continued to pursue charges (and settlements) against firms with undisclosed 12b-1 fee conflicts. Earlier this month, Centaurus Financial was ordered to pay $1.2 million as part of a settlement, while in December Voya Financial Advisors agreed to pay nearly $23 million concerning alleged mutual fund share class selection violations. CapWealth Advisors, a Tennessee-based firm accused of similar allegations by the commission, has opted to pursue its defense in court, with a jury trial date set for no later than June of next year.
Crown did not admit or deny findings in the agreement, but did agree to a cease-and-desist order, a censure and will pay $1,138,740 in disgorgement, as well as $154,173 in prejudgment interest and $295,000 in civil penalties, and will also distribute funds to affected clients, according to the commission.