SEC Charges Investment Adviser for Breaching Its Fiduciary Duty to Clients in Wrap Accounts and Orders a $5.8 Million Civil Penalty to Be Distributed to Harmed Clients
July 22, 2022
File No. 3-20933
July 22, 2022 - The Securities and Exchange Commission today announced settled charges against registered investment adviser Private Advisor Group, LLC for breach of fiduciary duty to advisory clients, including failures regarding conflicts disclosures, best execution, and duty of care.
The SEC's order finds that PAG invested certain wrap-program clients in higher-cost mutual fund share classes than were otherwise available, while failing to disclose the conflicts of interest associated with those investments. The order also finds that, like many wrap programs, PAG was responsible for all client trading costs, including fees for buying and selling mutual funds. According to the order, since at least July 2014, PAG and its investment adviser representatives avoided incurring transaction fees by investing in mutual fund share classes from a no-transaction-fee program offered by its clearing firm, including those that charged fees pursuant to Rule 12b-1 of the Investment Company Act of 1940, instead of lower-cost share classes of the same fund. As set forth in the order, although PAG and its investment adviser representatives did not receive any 12b-1 fees, they avoided paying transaction fees on client trades in the more expensive mutual fund share classes.
The order finds that PAG did not provide full and fair disclosure to clients concerning its use of no-transaction-fee mutual fund share classes in wrap accounts and its associated conflicts of interest. Similarly, the order finds that PAG breached its duty of care, including its duty to seek best execution, by causing wrap clients to invest in fund share classes that charged 12b-1 fees when share classes of the same funds that presented a more favorable value were available to the clients.
The SEC's order finds that PAG willfully violated the antifraud and compliance 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, PAG consented to a cease-and-desist order and a censure, and agreed to pay a civil money penalty of $5.8 million. PAG also agreed to distribute funds to harmed clients and comply with certain undertakings.
The SEC's investigation was conducted by Janene M. Smith and supervised by Virginia M. Rosado Desilets and Gary Y. Leung, all of the Enforcement Division's Asset Management Unit in the Washington, DC and Los Angeles offices. John Farinacci, an Asset Management Unit industry specialist, and Judy Tran and Michael Barnes of the Division of Economic and Risk Analysis assisted with the investigation.