SEC Orders Investment Adviser to Return Nearly $1.5 Million to Clients Harmed by Share Class Selection Disclosure Violations
Sept. 30, 2019
File No. 3-19570
September 30, 2019 - The Securities and Exchange Commission today announced that dually-registered investment adviser and broker-dealer Founders Financial Securities, LLC has agreed to settle charges that it invested clients in more expensive mutual fund share classes, which provided the firm with financial benefits, without disclosing this conflict to clients. The settlement includes a distribution to harmed investors.
The SEC's order finds that Maryland-based Founders purchased, recommended or held for advisory clients mutual fund share classes that charged 12b-1 fees instead of available lower-cost share classes of the same funds for which the clients were eligible. Those 12b-1 fees were then passed on to Founders, or used to offset amounts due from Founders for the cost of client custody services. This practice created a conflict of interest that the firm did not adequately disclose to clients. In addition, the order finds that Founders breached its duty to seek best execution for its clients by investing them in mutual fund share classes with 12b-1 fees rather than available lower-cost share classes of the same funds. According to the SEC's order, Founders also failed to adopt and implement written policies and procedures designed to prevent these violations.
The SEC's order finds that Founders violated the antifraud provisions of Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder. Without admitting or denying the SEC's findings, Founders will pay disgorgement of $1,246,133, prejudgment interest of $229,332, and a civil penalty of $140,000. Founders has agreed to distribute $1,475,465 to harmed investors. Founders also consented to a censure and the entry of a cease-and-desist order from committing or causing further violations of these provisions of the federal securities laws.
The SEC's investigation was conducted by Brian P. Thomas and Assunta Vivolo of the Philadelphia Regional Office, and supervised by Kelly L. Gibson and G. Jeffrey Boujoukos. The examination that led to the investigation was conducted by Aidan H. Busch, Peter Simons and Symon Owade of the Philadelphia Regional Office, under the supervision of Eric A. Elefante.