An investment services subsidiary of a bank agreed to settle SEC charges as to allegations that the firm improperly collected fees from clients.
On September 14, 2017, the SEC charged SunTrust Investment Services ("SunTrust"), a subsidiary of SunTrust Banks, with collecting more than $1.1 million in avoidable fees from clients by recommending and purchasing more expensive share classes of various mutual funds when cheaper shares of the same funds were available. According to the Order, representatives at SunTrust purchased "Investor class" (Class A) shares for clients despite the availability of "Institutional class" (Class I) shares that were less expensive. The Class I shares charged marketing and distribution fees pursuant to Investment Company Act Rule 12b-1. Investors were not informed of their eligibility for the less costly share class options (e.g., the share classes that did not charge 12b-1 fees), nor were they made aware of the apparent conflict of interest.
SunTrust was specifically charged with violating Advisers Act Sections 206(2), 206(4), 207, and Rule 206(4)-7. To settle the charges, SunTrust agreed to be censured and pay $1,148,071.77, and pay disgorgement plus interest on any leftover amount of the avoidable 12b-1 fees that are being refunded to clients. More than 4,500 investor accounts were affected.
The SEC Division of Corporation Finance did grant SunTrust no-action relief from being considered an "ineligible issuer" under Securities Act Rule 405. The Division determined that SunTrust qualified for the exemption by demonstrating a showing of "good cause."
Commentary / Steven Lofchie
The number of firms that have been sanctioned for improper sales of mutual fund shares is very high. Clearly, this is an area of focus for regulators. They are looking to find instances where retail customers are being disadvantaged. Even firms that are not completely confident in their compliance procedures, particularly technology procedures, should make sure that they are working with this in mind.
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