MML Investors Services, a dually registered investment advisor and broker/dealer and subsidiary of MassMutual Holdings, settled charges with the Securities and Exchange Commission alleging the firm financially benefited from an agreement with their clearing broker when recommending certain mutual fund share classes without disclosing those conflicts to clients.
Springfield, Mass.–based MML has been registered as an IA since 1993 and b/d since 1982. It has about $49 billion in regulatory assets under management, according to the commission’s settlement order filed last Friday. The allegations in the order also concerned MSI Financial Services, a former dual registrant that was integrated into MML in 2017.
Mutual fund sponsors paid the unnamed and unaffiliated clearing broker used by MML a recurring fee so the share classes of funds it advised would be offered in the broker’s mutual fund programs, according to the SEC order. The clearing broker had both a no-transaction-fee mutual fund program, as well as a program in which investors would have to pay such transaction fees.
But the share classes in the non-transaction-fee program often had higher expense ratios with higher recurring fees paid by investors to the clearing broker than other share classes offered outside of that program, according to the commission. Starting in October 2015 through February 2017, MSI received revenue sharing from that program, while MML financially benefited between March 2016 and February 2017, and started again in October 2018, according to the order.
The broker’s mutual fund program with transaction fees also paid revenue sharing to MML and MSI on some share classes, and those share classes similarly had higher expense ratios and higher fees than other options offered by the broker outside the program. Starting in 2015, the clearing broker had an agreement with MML and MSI that the broker would share its revenue with them based on the amount of their customers’ assets invested in the mutual fund programs, according to the SEC.
“The payments (MML) and MSI received under the agreement created an incentive for (MML) and MSI to recommend or favor mutual funds covered by the agreement over other investments, including lower-cost share classes of the same mutual fund where rendering investment advice to clients,” the SEC order read.
From 2015 to 2017, MML and MSI disclosed in written materials that the clearing broker offered a mutual fund program without transaction fees and that mutual funds would often pay a fee to the clearing broker, part of which would be shared with the advisory firms. But MML nor MSI disclosed the conflicts, including that the firms were incentivized to favor certain mutual fund share classes over others, according to the SEC. The two firms also didn’t disclose that they received revenue sharing from the broker’s mutual fund program that included transaction fees, according to the order.
Beginning in October 2018 through December of the following year, MML received about $2.5 million in revenue sharing from its arrangement with its clearing broker, though it did not disclose this to clients, according to the SEC. During the investigation by the commission, MML credited the approximately $2.5 million raised during that time back to clients.
“MML Investors Services takes this matter very seriously and cooperated fully with the SEC,” Paula Tremblay, a spokesperson for MML Investors Services, said. “Similar to other industry participants, we have reimbursed impacted accounts and are pleased to have resolved this matter.”
Starting in January 2020, the firm changed its client brochures, indicating that it would “periodically review the universe of share classes that it offers” and make only one recommendation for clients; it would also amend clients’ investments if they were found to be invested in a certain share class when a more “favorable” option was available, according to the commission.
Though the firm didn’t admit or deny the allegations in the order, MML agreed to a censure and a cease and desist, as well as $2.1 million in disgorgement, prejudgment interest and a civil penalty of $700,000.