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SEC wins jury trial against firm accused of lack of share class

According to the Securities and Exchange Commission, a jury this week found that Ambassador Advisors, a Pennsylvania-based investment advisory firm, breached its duty when investing clients’ funds in mutual fund share classes, when more affordable alternatives were available.

The case involving Ambassador Advisors is a rare example of an advisory firm challenging the SEC’s allegations around mutual fund share class disclosures and taking the case to a jury trial; Most of the similar cases against advisory firms end up in settlement. SEC Enforcement Division director Gurbir S Grewal applauded Wednesday’s decision, saying he was pleased that Ambassador Advisors was held liable for what he described as “investment advisor fraud.”

He said, “Investment advisors have fiduciary duties to act in the best interest of their clients, to seek the best execution of client transactions and to fully and fairly disclose all material facts relating to conflicts of interest. ” “And when they don’t, as the jury found today, they put their customers at risk.”

The SEC first filed a complaint against the firm in May 2020. According to court records, Ambassador Advisors was based in Lancaster, Penn., with approximately $270.6 million in managed assets; Robert Kaufman (ambassador’s president), Bernard Bostwick (an executive vice president) and Adrian E. Young (another EVP and Chief Compliance Officer) was the other defendant in the case.

The SEC’s complaint focused on the firm’s actions from 2014 to 2018, when it managed between 2,300 and 4,900 customer accounts. Advisors often invest clients’ money in mutual fund share classes with fees, which compensates the firm, even though lower fee share classes of the same fund were available and, according to the SEC, were more suitable for clients.

In the case of funds with a 12b-1 fee, a portion of the investor’s investment will be returned to the broker as a referral fee. In this case, the fees would go to the ambassador’s brokers, and according to court documents the firm had an agreement with one of its brokers to get back 95% of those fees.

Overall, the SEC believed that the firm received at least $777,443 from fees. The SEC argued that the firm fell short on its best performing duties when it did not place clients’ funds in share classes with a “more favorable value” and made a mistake in not disclosing to clients that their investments were in excess of fees. was subordinate. Paid in the second share category.

In a statement issued after the verdict, the ambassador argued that Grewal’s characterization of the verdict appeared to be “more inflammatory” than was actually the case.

“The complaint was part of the SEC’s share class disclosure initiative in which several advisory firms across the country settled as the path of least resistance,” said Robert Neiden, the firm’s director of operations. “We were one of the only firms to challenge the SEC initiative to create new regulation without following the formal rule-making process.”

According to the ambassador, the firm followed the SEC’s instructions on “fine” disclosure, but the SEC (and ultimately the jury) argued that more was necessary, even as the ambassador argued not to charge customers more. was taken.

“Unfortunately, regardless of whether an advisor is leading a Ponzi scheme or simply omitting preferred disclosure terminology, any breach is considered a breach of fiduciary duty to clients,” the statement read. “As such, the 2014-2018 documents did not contain the SEC Enforcement Division’s constructive disclosure action, the ambassador was deemed a ‘fraud or fraud’.”

The disclosure of the mutual fund share category has been a busy area of ​​enforcement for the Commission in recent years. The SEC opened a window in 2018 for firms to self-disclose these types of mutual fund conflicts without penalty. Since then, the commission has aggressively pursued cases against firms that did not participate in the Amnesty program, most of which ended up being terminated. Paying and paying fines; Last summer, the commission brought charges against JW Cole Advisors, Cascade Investment Group, Centaurus Financial and Barthel Fisher & Company Financial Services.

But some cases may still be heard, including the commission’s complaint against Tenn-based advisory firm CapWealth Advisors. The SEC accused CapWealth of failing to disclose conflicts regarding mutual fund share class selections, but CapWealth founder and CEO Timothy J. Pagliara has vowed to fight the charges with a jury trial starting in June.

In a recent interview WealthManagement.comPagliara called the SEC’s allegations “totally intimidating, intimidating, and controlling overreach”, and lamented the plight of many RIAs when the commission accused them of share class selection disclosure violations.

“The problem is that nobody has the resources to fight them and it becomes very easy to solve,” he said. “They don’t have money to fight and they don’t investigate.”

Groups such as the Financial Services Institution have long criticized the SEC’s stock class enforcement practices, arguing that the commission was unfairly subjecting brokers to actual rules and regulations that the agency never passed. But according to Senate testimony from 2020, former SEC chairman Jay Clayton argued that the SEC’s approach was the best way to tackle widespread industry practice.

“I understand that some people felt that they were within the bounds of the law, where we thought they were not,” he said during the testimony. “I hope there’s more clarity brought in, but I’m also comfortable that the Department of Enforcement follows through, with the belief that they were on the right side of the law.”

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