(Article from Registered Funds Regulatory Update, October 2022)
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The SEC recently settled charges against Private Advisor Group (“PAG”) and Mesirow Financial Investment Management (“Mesirow”), each a registered investment adviser, for failing to disclose conflicts of interest that arose from the advisers’ recommendations of certain mutual fund share classes. Mesirow and PAG join dozens of other firms that have settled share class and similar conflicts of interest claims with the SEC in recent years.
Private Advisors Group
An Order found that, since at least July 2014, PAG allegedly invested certain client assets in higher-cost mutual fund share classes when lower cost options were available and failed to disclose the conflicts of interest related to those investments. According to the Order, PAG was responsible for paying transaction fees on mutual fund investments in client wrap accounts. Those transaction fees were deducted directly from investment adviser representatives’ compensation. The SEC alleged that PAG avoided incurring these transaction fees by investing certain client assets in a no transaction fee (“NTF”) program through its clearing firm. Certain mutual funds were made available to clients through both the NTF and wrap fee programs, and PAG recommended its clients invest in the NTF share classes, which often had 12b-1 fees, instead of the wrap fee program share classes of the same mutual fund, which did not have 12b-1 fees, to avoid paying the transaction fees on client trades within these mutual funds.
The Order found that PAG violated the anti-fraud provisions of the Advisers Act for failing to disclose conflicts of interest and breached its duty of care, including its duty to seek best execution, by failing to undertake an analysis to determine whether particular mutual fund share classes it selected were in its clients’ best interests.
Without admitting or denying the findings, PAG agreed to a cease-and-desist order, a censure and a civil monetary penalty of $5,800,000.
Mesirow Financial Investment Management
An Order found that, from at least February 2015 through May 2019, Mesirow breached its fiduciary duty to its advisory clients by recommending investments in mutual funds and share classes that paid revenue sharing to its affiliated broker-dealer, Mesirow Financial, Inc. (“MFI”), without disclosing the conflict of interest. Some of these mutual funds that paid revenue sharing were more expensive than lower cost options available to clients, including lower cost share classes of the same mutual funds that did not participate in revenue sharing. According to the Order, Mesirow also breached its duty to seek best execution by causing these advisory clients to invest in more expensive share classes of mutual funds when share classes of the same funds were available to clients that presented a more favorable value.
Without admitting or denying the findings, Mesirow agreed to a cease-and-desist order, a censure, disgorge profits of $487,862 plus interest and a civil monetary penalty of $170,000.
In the Matter of Private Advisor Group, LLC, SEC Admin. Proc. File No. 3-20933 (July 21, 2022), available at: https://www.sec.gov/litigation/admin/2022/ia-6069.pdf.
In the Matter of Mesirow Financial Investment Management, Inc., SEC Admin. Proc. File No. 3-20934 (July 22, 2022), available at: https://www.sec.gov/litigation/admin/2022/34-95351.pdf.