Securities Industry Commentator by Bill Singer ESQ

1. These proceedings arise out of breaches of fiduciary duty, inadequate disclosures, and deficiencies in compliance policies and procedures by registered investment adviser SAA in connection with its mutual fund share class selection practices. From at least February 1, 2012 to December 31, 2016 (the "Relevant Period"), SAA invested advisory clients in mutual fund share classes that charged 12b-1 fees instead of less expensive share classes of the same funds that were available without 12b-1 fees. SAA's affiliated broker-dealer, Securities America, Inc. ("SAI"), received 12b-1 fees based on these investments, of which SAI paid a portion to its registered representatives, who acted as investment adviser representatives ("IARs") of SAA for the relevant SAA advisory client accounts. However, SAA's disclosures failed to adequately inform its clients of the conflict of interest presented by its IARs' share class selection practices. In particular, SAA failed to disclose that its IARs had a conflict of interest as a result of the additional compensation an IAR received for investing advisory clients in a fund's 12b-1 fee paying share class when a less expensive share class was available for the same fund. Furthermore, the practice of investing advisory clients in mutual fund share classes that charged 12b-1 fees rather than lower-cost share classes of the same funds was inconsistent with SAA's duty to seek best execution for those transactions. Additionally, during the Relevant Period, SAA failed to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder in connection with its mutual fund share class selection practices. 

2. As a result of the conduct described above, SAA willfully violated Sections 206(2), 206(4), and 207 of the Advisers Act and Rule 206(4)-7 thereunder.

1. These proceedings arise out of improper mutual fund share class selection and billing practices by PNCI, a registered investment adviser and broker-dealer. First, from at least 2012 to 2016 (the "Relevant Period"), PNCI invested advisory clients in mutual fund share classes with 12b-1 fees instead of available lower-cost share classes of the same funds without 12b-1 fees. PNCI financially benefitted from investing advisory clients in mutual fund share classes with 12b1 fees, which created a conflict of interest that PNCI failed adequately to disclose in its Forms ADV or otherwise. In addition, PNCI breached its duty to seek best execution for its clients by investing them in mutual fund share classes with 12b-1 fees rather than lower-cost share classes. During the Relevant Period, PNCI received over $5.129 million in 12b-1 fees for investing clients in higher-cost share classes. 

2. Second, during the Relevant Period, PNCI received marketing support payments from three mutual fund complexes. The mutual fund complexes paid PNCI over $497,000 in marketing support payments, which were due only when PNCI invested its advisory clients in mutual fund share classes that charged 12b-1 fees. PNCI did not receive such fees when it invested advisory clients in share classes that did not charge 12b-1 fees. PNCI never disclosed this conflict of interest in its Forms ADV or otherwise. 

3. Third, during the Relevant Period, PNCI improperly charged over $105,000 in advisory fees to client accounts whose investment adviser representative had departed the firm ("Orphaned Accounts") and for which PNCI had failed to assign a new investment adviser representative within thirty days thereafter. 

4. Finally, PNCI failed to adopt and implement written compliance policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder in connection with its mutual fund share class selection practices and treatment of Orphaned Accounts. As a result of this conduct, PNCI willfully violated Sections 206(2), 206(4) and 207 of the Advisers Act and Rule 206(4)-7 thereunder.

1. These proceedings arise from a series of failures by Geneos, a registered investment adviser and broker-dealer, in connection with its mutual fund share class selection practices and its receipt of revenue sharing payments. First, from February 2012 through April 2017 (the "Relevant 12b-1 Period"), Geneos invested certain advisory clients in mutual fund share classes that charged 12b-1 fees when these clients were eligible to invest in cheaper share classes of the same funds that did not charge such fees. Geneos financially benefitted from investing advisory clients in mutual fund share classes with higher fees, which created a conflict of interest that Geneos failed to adequately disclose in its Forms ADV, Part 2A ("firm brochures") or otherwise. In its capacity as a broker-dealer, Geneos received at least $1,047,617.50 in 12b-1 fees based on its advisory clients' investments in the higher-fee share classes. Geneos' practice of investing advisory clients in mutual fund share classes that charged 12b-1 fees rather than cheaper share classes of the same funds was also inconsistent with its duty to seek best execution. 

2. Second, from February 2012 through January 2018 (the "Relevant Revenue Sharing Period"), Geneos failed to disclose to its clients compensation that it received through agreements with two third-party broker-dealers ("Clearing Brokers") and conflicts arising from that compensation. Pursuant to the agreements, the Clearing Brokers agreed to share with Geneos certain revenues that the Clearing Brokers received from the mutual funds in the Clearing Brokers' no-transaction-fee mutual fund programs ("NTF Programs"). These payments, totaling $386,185.77, created a conflict of interest in that they provided a financial incentive for Geneos to favor the mutual funds in the NTF Programs over other investments when giving investment advice to its advisory clients. 

3. Finally, Geneos failed to adopt written policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder in connection with its mutual fund share class selection practices and its revenue sharing arrangements with the Clearing Brokers. 

4. As a result of the conduct described above, Geneos willfully violated Sections 206(2), 206(4), and 207 of the Advisers Act and Rule 206(4)-7 thereunder. 

• Securities Industry Commentator
• Bill Singer