Share Class Disclosure Failures Lead to SEC Settlements

The Securities and Exchange Commission (SEC) has announced the settlement of various charges filed against two New York-based investment advisory shops and the CEO of one of the firms.

According to SEC enforcement staff, advisers with the firms selected mutual fund share classes inconsistent with their disclosures to clients. The firms and the CEO will collectively pay more than $1.8 million, which will be returned to harmed investors.

According to the SEC’s orders, the parties entering the settlements are American Portfolios Advisers Inc., PPS Advisors Inc., and PPS’s Chief Executive Officer and Chief Investment Officer Lawrence Nicholas Passaretti.

SEC says these entities invested advisory clients in mutual fund share classes that paid 12b-1 fees to the firms’ investment adviser representatives (IARs), even though less expensive share classes of the same funds were available. The orders find that American Portfolios and PPS “failed to disclose conflicts of interest, violated their duty to seek best execution, and failed to implement policies and procedures designed to prevent violations of federal securities laws in connection with their mutual fund share class selection practices.” 

In particular, in disclosures to clients, American Portfolios incorrectly stated that its IARs either did not receive 12b-1 fees or only selected the more expensive share classes when less expensive share classes of the same fund were unavailable, while PPS incorrectly stated that it selected higher-cost share classes for the “long-term benefit” of clients and only where less expensive share classes of the same fund were unavailable.

Without admitting or denying the findings, American Portfolios, PPS and Passaretti consented to cease-and-desist orders, and American Portfolios and PPS consented to censures. American Portfolios agreed to pay $895,353 in disgorgement and prejudgment interest and a civil penalty of $250,000. PPS and Passaretti agreed to pay $631,746 in disgorgement and prejudgment interest and a civil penalty of $75,000. Collectively, the firms and Passaretti will pay more than $1.8 million, which will be distributed to harmed clients through Fair Funds.

According to SEC staff, American Portfolios and PPS were not eligible to self-report pursuant to the Division of Enforcement’s Share Class Selection Disclosure Initiative announced in February because the Division contacted them about the disclosure violations before the initiative was announced.