Mutual Funds

Wells Fargo, LPL Financial, and Raymond James to Pay Investors of Retirement Accounts and Charities Over $30M for Mutual Fund Overcharges

Published on: July 6, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority said that LPL Financial, LLC (LPLA), Raymond James & Associates (RJF), Raymond James Financial Services, Wells Fargo Advisors, LLC (WFC), and Wells Fargo Advisors Financial Network, LLC must pay over $30M in restitution plus interest to customers who were impacted when the firms did not waive mutual fund sales charges for certain retirement and charitable accounts. According to the self-regulatory organization, between July 2009 and the end of 2014 the financial firms either improperly overcharged certain investors who had purchased Class A mutual fund shares or sold them Class B or C shares instead. The latter two come with ongoing, high back-end fees.

Mutual funds typically offer different share classes for sale. Each class has its own sales fees and charges. Although Class A shares come with an initial sales charge, they usually have lower annual fees than Class B and C shares. However, mutual funds will usually waive Class A sales charges when selling them to charities and some retirement accounts.

The broker-dealers offered these waivers for the retirement and charitable plan accounts under limited conditions. The waivers also were disclosed in prospectuses. Yet, according to FINRA, at various times since at least July 2009, the firms did not actually waive the sales charges for these customers when they were offered the Class A shares.

Because of this, contends the agency, over 50,000 eligible retirement accounts and charitable organizations either paid sales charges for the Class A shares or bought other share classes that required them to pay higher ongoing fees and other expenses. FINRA said that the firms did not properly supervise the sale of these mutual funds and depended on its brokers to offer the waiver discounts even though they weren’t properly trained.

SEC Appeals Its In-House Agency Judge’s Decision to Throw Out Charges Against Financial Advisers Paid by Fidelity to Push Specific Mutual Funds

Published on: July 2, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Securities and Exchange Commission employees are appealing a ruling by an administrative law judge dismissing charges against two financial advisers accused of not notifying clients that Fidelity Investments (FNF) had paid them to sell specific mutual funds. In the Texas securities case, SEC Administrative Law Judge James E. Grimes rejected claims that The Robare Group and two of its owners violated the law by failing to adequately disclose that they had a financial relationship with the brokerage firm. Grimes said that from listening to Mark L. Robare and his son-in-law Jack L. Jones Jr. testify, he was hard pressed to imagine them attempting to bilk anyone. This is one of the few cases presided over by one of its judges that the SEC has lost.

Fidelity is The Robare Group’s custodian. For the last 11 years, the registered investment advisor has been part of a program in which Fidelity pays it a portion of the revenue earned from the sale of certain third-party mutual funds. The payment goes to the adviser who made the mutual fund sale happen.

Advisors are given access to the funds without any transaction fees. As the custodian, Fidelity refers to payments made to advisers not as commission but as compensation for shareholder administrative fees.

In their appeal, the SEC staffers said that they feared Grimes’ ruling in this case establishes a troubling precedent that shifts the burden of full disclosure of a conflict interest from an investment adviser to a compliance consultant. They said this could allow an investment adviser to be excused from certain securities violations as long as he has a compliance consultant that has not “affirmatively” objected to a “particular disclosure.”
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SEC Cases: Insider Trading Charges Filed Against Georgia Resident, Mutual Fund Adviser Accused of Improper Asset Handling, & Two-Ex CFOs Agree to Give Back Bonuses Because of Accounting Fraud

Published on: February 14, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Atlanta, GA Man Accused of Making $740,000 for Insider Trading

The Securities and Exchange Commission is filing charges against a Georgia man who is accused of insider trading and making about $740,000 in illicit profits. Charles L. Hill allegedly traded in Radiant Systems stock based on the confidential insider data a friend gave him about an upcoming tender offer to purchase the company. The friend was a friend of a Radiant Systems executive.

In 2011, Hill bought about 100,000 shares valued at close to $2.2 million on the final day of trading prior to the public announcement of the acquisition. That was his first time buying stock of Radiant Systems, and before that it had been years since he’d purchased equity securities.

Alternative Fund Manager Faces SEC Case, Criminal Charges Alleging $16M Fraud Involving Fake Loans and GL Beyond Income Fund

Published on: January 9, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Securities and Exchange Commission has filed a civil case against alternative fund manager Daniel Thibeault accusing him of taking some $16 million in assets from the GL Beyond Income Fund (GLBFX). Thibeault was arrested on securities fraud charges over the same matter last month.

According to the SEC, Thibeault took out faked loans using Taft Financial Services, which is an intermediary that he allegedly controlled, to steal money from the funds. The purported securities scam is said to have begun in 2013, after the GL fund started losing money. The Commission says that in certain cases documents for the loans that were withdrawn via Taft are missing or had errors in them, including inaccurate birth dates for borrowers.

The regulator’s complaint also names GL Investment Services, which Thibeault indirectly owns. The registered investment adviser, which had about $130 million in assets from approximately 700 clients, is accused of advising customers to put money in the GL fund.

SEC Working on Mutual Fund Regulations, Conducts Dark Pool Probes, Enacts New Exchange Rules

Published on: November 20, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Securities and Exchange Commission is developing regulations that would make sure that mutual funds are liquid enough to satisfy client redemptions and money managers have a plan should a fund fail. Part of the regulator’s strategy may include limiting how mutual funds are allowed to place in assets that are hard-to-sell and use derivatives to enhance returns.

InvestmentNews reports that according to a report issued by the International Monetary Fund last month, mutual funds’ holdings of leveraged loans, junk bonds, and other assets that don’t trade often had higher market and liquidity risks. The IMF said that this could “compromise” financial stability unless the matter is dealt with. Mutual funds also have come under the Financial Stability Oversight Council’s scrutiny.

Per the SEC’s agenda, regulators could propose new mutual fund rules in October of next year. Earlier this year, when Commission Chair Mary Jo White talked about an action plan that the agency was developing to enhance asset management oversight, she noted that the regulator intends to mandate that mutual fund investments provide more disclosures. The SEC has been seeking to gain greater insight into whether the asset management industry presents a risk to the financial system.

SEC Examines Municipal Advisers and Alternative Mutual Funds, Reviews “Wrap-Fee” Accounts

Published on: August 20, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission introduced a two-year plan to examine municipal advisers who assist localities and states to raise money in the $3.7 trillion municipal bond market. During this period, regulators plan to look at a significant chunk of the approximately 1,000 SEC-registered municipal advisers.

These advisers are usually small firms with one or two employees. They are not affiliated with banks. Municipal advisers are retained to time, price, and market muni-bond transactions.

The SEC has been clamping down on municipalities for not updating investors about their financial health. The regulator wants the U.S. Congress to give it more authority in the market. Right now, muni issuers are exempt from disclosure requirements that corporations have to make when selling securities. Now the agency wants to know whether municipal advisers are meeting their fiduciary duty and placing clients’ interests before their own.

SEC Director Warns About Recommending Alternative Mutual Funds To Certain Investors

Published on: March 7, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission’s Office of Compliance Inspections and Examinations Director Andrew Bowden says that investment advisers should be careful when putting investors in alternative mutual funds. The agency says there has been a rise in complex trading strategies in mutual funds and nontraditional investments, with assets in alternative mutual funds reaching $168 billion in October. This is an increase from the $158 billion achieved the previous year.

While using these mutual funds may raise returns, investors can be placed at greater risk in the event that the market were to drop, especially if these products involved have limited secondary markets. Bowden says the agency intends to conduct a sweep of the $200 billion alternative find industry and examine the way it uses specific private fund strategies in public-traded investments.

It was last month that the SEC announced that it would look at both hedge fund and alternative investment strategies in exchange-traded funds, open-ended funds, and variable annuity structures. The regulator wants to look at if the ways that the funds are being promoted comply with regulations.

Are Alternative Investments Good for Investors?

Published on: October 30, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Even as alternative mutual funds have become very popular among financial advisers and investors These investments employee a variety of complex investment strategies and opportunities to create portfolio diversification that are supposed to protect clients from steep market drops. Already, billions of dollars have gone into these funds in recent years. Their total assets, at around $234 billion right now, are a 33% increase from last year. However, just because so many people are interested in alternative mutual funds doesn’t mean they are good for the average investor.

According to The New York Times, there are some financial advisers who are cautioning customers to exercise great care for the same reason that a lot of investors decide not to go with traditional mutual funds that are actively managed-because it is tough to identify which alternative investment managers are talented/skilled enough to do the job right and which ones could end up getting lucky.

Also, it can be hard enough comprehending any fund prospectus. Multi-alternative funds have hedge-fund-like strategies and managed futures. Then, there are the nontraditional bond funds, which trade on anticipating what bonds will do next and hedging risks linked to rates. Seeing as it is important for investors to be able to comprehend what they are getting into, alternative mutual funds might not be the best choice for the average investor.

US Chamber of Commerce Wants Treasury Secretary to Let SEC Finish Study About Money Market Mutual Funds Before Pressing for Action

Published on: November 15, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Chamber of Commerce has written a letter to Treasury Secretary Timothy Geithner asking him to rescind the request he made to the Financial Stability Oversight Council to press the Securities and Exchange Commission to take further action on money market mutual funds. Instead, they want the SEC to be allowed to first finish its study on the impact its 2010 reform steps have already had up to this point.

The Chamber implied that if FOSC were to invoke its powers, per the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 120, to make the SEC act, this could place the financial markets in peril. It said that not only was invoking Section 120 premature, and at “cross-purposes” with the mandate the Commission has to “promote capital formation” but also this would subject money market mutual funds to what would be the equivalent of “joint oversight by the FSOC.”

Under Section 120, the FSOC is authorized to recommend that primary financial regulators implement “new or heightened standards and safeguards” after finding that a financial activity could create systemic risk. Such a recommendation has to be made available for public comment before it is formally adopted. (Following a final recommendation, the Commission would have 90 days to comply, implement a similar measure, or give reason for why it chose not to act.)

“Business owners are solicited to join the Chamber of Commerce and pay dues. But does the ‘Chamber’ even represent their interests?,” said Shepherd Smith Edwards and Kantas, LTD, LLP Founder and Money Market Mutual Fund Fraud Attorney William Shepherd. “This is an example of how the Chamber spends their dues. But I would say that the vast majority of those who own businesses are more interested in transparency and safety when they invest into money market funds than protecting those running these funds from regulations.”

Geithner, who is also FSOC chairman, had introduced a parallel strategy a couple of months ago that he said would assist in limiting systemic risk from money market funds. In addition to a letter to council members urging the FSOC to use Section 120 to make a formal recommendation of action by the SEC, he also put out groundwork for a number of measures by federal regulators should the Commission decide not to act.

The Treasury Secretary’s plan involves two initiatives that the SEC is considering: Requiring the funds to keep capital buffers or moving them to a floating net asset value. (SEC Chairman Mary Schapiro, who in August wasn’t able to garner enough commissioner support to move forward with proposed money market mutual fund measures, has expressed support for Geithner’s plan. She too believes that money market funds are a systemic risk.)

Addressing the 2010 rule changes by the SEC in 2010, Geithner, in his letter, said that they failed to tackle a couple of core money funds characteristics that place the funds at risk of “destabilizing runs”: a “first-mover advantage,” which can spur investors to redeem shares upon first signs of a possible threat to the liquidity or value of the fund, and the need for “explicit loss-absorption capacity” in the event of a decline in a portfolio security’s value.

US Chamber of Commerce

Financial Stability Oversight Council

More Blog Posts:
Securities Lawsuit Over Excessive AXA Mutual Fund Management Fees in Variable Annuity Program Can Proceed, Says NJ District Court, Stockbroker Fraud Blog, October 2, 2012

Securities Fraud: Mutual Funds Investment Adviser Cannot Be Sued Over Misstatement in Prospectuses, Says US Supreme Court, Stockbroker Fraud Blog, June 16, 2011

Securities Roundup: Study Recommends Against Additional Money Fund Reforms, Lawmakers Disagree on Whether Dodd-Frank Wiped Out “Too Big to Fail” & An SEC Committee Approves Recommendations to Proposed General Solicitation Ban

Published on: October 31, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Per a study released by the U.S. Chamber of Commerce, it is “ill-advised” to regulate money market mutual funds further due to the effective reforms that the SEC already implemented two yeas ago, including revisions that made the funds more transparent and liquid and not as high risk. The study comes in the wake of debate between lawmakers, market participants, and regulators about more regulations to the industry. For example, SEC Chairman Mary Schapiro has been pushing for the additional reforms because she believes the money market mutual fund industry continues to be a threat to the financial system.

The authors of the study derived their findings from money fund investment data that had been filed with the Commission, as well as from information on commercial paper from the Federal Reserve. Among its conclusions is that the reforms in 2010 made the funds more liquid and better equipped to deal with significant redemption changes. Also, in the last two years, the funds have begun to shift “more dynamically” through geographies and asset classes in reaction to “evolving risks.”

Another area that has been up for debate is whether the Dodd-Frank Wall Street Reform and Consumer Protection Act has, in fact, ended “too big to fail” and outlawed bailouts. Rep. Barney Frank (D-Mass) issued an analysis earlier this month that said that the law does. However, another report, by House Financial Services Committee Chairman Rep. Spencer Bachus (R-Ala), disagrees.