Share Class Issues, Churning Drive Securities Settlement

Secretary of the Commonwealth of Massachusetts William Galvin has levied a sizable fine against the national advisory firm Janney Montgomery Scott over an agent’s “frequent sales” of mutual funds with higher front-loaded fees.

The fine clocks in at over $286,000, according to Galvin’s office, and the advisory firm has also been ordered to pay nearly $164,000 in additional restitution to investors. According to Galvin, the fine and restitution were included in a consent order filed this week by the Massachusetts Securities Division.

The fine and restitution payments come after the Massachusetts Securities Division alleged and investigated Janney’s failure to supervise agent Stephen Querzoli’s short-term trading of Class A shares of mutual funds. According to Galvin, Class A shares typically have front-loaded fees and lower annual expenses compared with other class shares.

“Though such shares are generally held for periods of three to five years or more, Querzoli would frequently sell such mutual funds after mere months, using the proceeds to purchase new mutual funds and driving up commissions charged to customers by thousands of dollars,” Galvin says in a statement published alongside the consent order. “Janney did little to stop its agent’s improper sales practices, leaving him unchecked even after opening their own inquiry three years into the time period during which the inappropriate sales were taking place.”

Beyond the fine and restitution, the company also will be required to conduct a full review of its policies and procedures relating to the short-term trading of Class A shares of mutual funds to ensure compliance with state and federal laws.

The fine and restitution order calls to mind many of the retirement plan focused lawsuits that have been filed in recent years under the Employee Retirement Income Security Act (ERISA). Simply put, litigators and regulators have both made share class issues a focal point of their fiduciary challenges filed against plan sponsors, recordkeepers and advisers alike. While a mix of decisions has been handed down by federal courts so far in such cases, many judges and juries seem willing to side with plaintiffs who say they were unfairly directed into more expensive share classes when cheaper but otherwise identical investment products were also available.