SEC Charges Tennessee Investment Advisory Firm and Two Advisory Representatives with Steering Clients to Higher-Fee Mutual Fund Share Classes
Dec. 21, 2018
File No. 3-18952
December 21, 2018 – The Securities and Exchange Commission today announced that Tennessee-based investment adviser, Thoroughbred Financial Services, LLC (Thoroughbred Financial), and two of its investment adviser representatives have agreed to pay nearly $1.7 million to settle charges that they improperly invested clients in more expensive mutual fund share classes that charged fees, known as 12b-1 fees, when less expensive share classes of the same funds were available without the fees.
The 12b-1 fees charged to Thoroughbred Financial’s clients were paid back to Thoroughbred Financial, which then shared portions of those fees with its adviser representatives. The SEC’s Order finds that Thoroughbred Financial, along with its President, Thomas Jenkins Parker (Parker), and Thoroughbred Financial investment adviser representative, Lawrence Randall “Randy” Hartley (Hartley), breached their fiduciary duties and failed to adequately disclose to advisory clients the conflict of interest created by investing clients in the higher-cost shares while profiting from the investments. The SEC’s Order finds that, between October 2012 and August 2016, Parker and Hartley were the top two Thoroughbred Financial recipients of avoidable 12b-1 fees.
The SEC’s Order further finds that: (i) by investing clients in Class A shares with 12b-1 fees, Thoroughbred Financial avoided certain transaction costs, known as “ticket charges,” that the firm otherwise would have incurred; (ii) Thoroughbred Financial failed to adopt and implement policies and procedures reasonably designed to prevent these violations; and (iii) Parker and Hartley, when converting clients to lower-cost share classes in 2016 following a compliance inspection and examination by Commission staff, made misleading statements and omissions to clients about the prior availability of Class I shares.
The SEC’s Order finds that Thoroughbred Financial, Parker, and Hartley violated the antifraud provision of Section 206(2) of the Investment Advisers Act of 1940 (Advisers Act), and that Thoroughbred Financial violated the antifraud and compliance provisions of Sections 206(4) and 207 of the Advisers Act and Rule 206(4)-7 thereunder. Without admitting or denying the findings, Thoroughbred Financial, Parker, and Hartley have consented to the entry of the Order requiring them to pay pursuant to the following respective terms:
- Thoroughbred Financial shall pay disgorgement of $740,250, prejudgment interest of $108,368, and a civil penalty of $260,000;
- Parker shall pay disgorgement of $217,883, prejudgment interest of $31,750, and a civil penalty of $75,000; and
- Hartley shall pay disgorgement of $158,032, prejudgment interest of $22,957, and a civil penalty of $65,000.
The disgorgement, prejudgment interest and civil penalty amounts will be placed into a Fair Fund to be used to compensate affected Thoroughbred Financial clients. Thoroughbred Financial, Parker, and Hartley also consented to cease-and-desist orders and censures.
Thoroughbred Financial was not eligible to self-report pursuant to the SEC Division of Enforcement’s Share Class Selection Disclosure Initiative announced on February 12, 2018, because the Division contacted it about these disclosure violations before the Initiative was announced.
The SEC’s investigation was conducted by Brian M. Basinger and Stephen E. Donahue of the Asset Management Unit in the Atlanta Regional Office, and Edward G. Sullivan, trial counsel in the Atlanta Regional Office. The examination that led to the investigation was conducted by Robert Cowdin, Deborah Shaw, Satyan Singh and Gina Bailey of the Atlanta Regional Office.