SEC Sanctions Nebraska-Based Investment Adviser for Best Execution Failures in Selecting Mutual Fund Share Classes
The Securities and Exchange Commission today sanctioned an Omaha, Neb.-based investment advisory firm and its owner for failing to seek the most beneficial terms reasonably available when investing in mutual fund shares for three funds that they managed.
An SEC investigation found that Manarin Investment Counsel Ltd. and Roland R. Manarin violated their obligation to seek what is known as “best execution” by consistently selecting higher cost mutual fund shares for the three fund clients even though cheaper shares in the same mutual funds were available. As a result, the clients paid avoidable fees on their mutual fund holdings, which were passed through to a brokerage firm owned by Manarin in a practice inconsistent with the disclosures they made to investors. The brokerage firm also is charged with violations.
Manarin and his firms agreed to pay more than $1 million to settle the charges.
“Investment advisers must fulfill their fiduciary duty of best execution when selecting mutual fund shares for their clients,” said Marshall S. Sprung, co-chief of the SEC Enforcement Division’s Asset Management Unit. “Manarin and his firm breached that duty by choosing more expensive shares that would pay higher fees to an affiliate when their clients were eligible to own lower-cost shares in the very same mutual funds.”
According to the SEC’s order instituting settled administrative proceedings, Manarin Investment Counsel provides investment advice to a mutual fund called Lifetime Achievement Fund (LAF) as well as two private funds known as Pyramid I Limited Partnership and Pyramid II Limited Partnership. As “funds-of-funds” they invest their assets principally in the shares of various mutual funds.
The SEC’s order finds that from 2000 to 2010, Manarin and his investment advisory firm caused these fund clients to invest in “Class A” mutual fund shares when they were eligible to own lower-cost “institutional” shares in the same mutual funds. Because they owned “Class A” shares, the clients paid ongoing 12b-1 fees on their mutual fund holdings for distribution and shareholder services. Such fees often could have been avoided had Manarin and his firm purchased institutional shares on the clients’ behalf. Instead, the unnecessary fees were passed through to Manarin’s broker-dealer Manarin Securities Corp. Although Manarin’s brokerage firm eventually refunded 12b-1 fees paid by LAF, it did not refund fees to the Pyramid funds. From June 2000 to October 2010, Manarin Securities Corp. received approximately $685,000 in 12b-1 fees from mutual funds in which the Pyramid funds could have purchased institutional shares.
The SEC’s order finds that by failing to seek best execution when selecting among available mutual fund share classes, Manarin and his investment advisory firm violated their fiduciary duty as investment advisers under Section 206(2) of the Investment Advisers Act of 1940. Because their ongoing practice was inconsistent with disclosures in LAF’s registration statement and the offering memoranda for the two Pyramid funds, the order finds that Manarin and his investment advisory firm violated Section 206(4) of the Advisers Act and Rule 206(4)-8. The SEC’s order also finds that Manarin violated Section 34(b) of the Investment Company Act of 1940, and that he and both firms violated Section 17(a)(2) of the Securities Act of 1933. The SEC’s order further finds that Manarin’s brokerage firm charged commissions to LAF that exceeded the usual and customary amounts charged by broker-dealers for transactions in shares of exchange-traded funds – in violation of Section 17(e)(2)(A) of the Investment Company Act.
Manarin and his brokerage firm agreed to pay disgorgement of $685,006.90 and prejudgment interest of $267,741.72. Manarin agreed to pay a $100,000 penalty. Without admitting or denying the SEC’s findings, Manarin and his firms also consented to censures and cease-and-desist orders.
The SEC’s investigation was conducted by Coates Lear and Kurt Gottschall of the Asset Management Unit in the Denver Regional Office. Examinations of the firms were conducted by Susan Day, Philip Perrone, and Nicholas Madsen of the Denver office’s investment adviser/investment company and broker-dealer examination programs.