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Adviser Failed Best Execution When Recommending 12b-1 Fund Class


An investment adviser agreed to pay over $2 Million in disgorgement, interest and penalties for failing to buy the least expensive share class of recommended mutual funds.  The SEC maintains that the respondent, an investment adviser representative of a large advisory firm, recommended Class A shares that carried a 12b-1 fee instead of lower-expense institutional shares.  The adviser received a portion of the 12b-1 fees from the clearing firm as revenue sharing.  The SEC did not absolve the adviser even though he received approval for the practice after consulting his firm’s management.  The SEC asserts that the adviser violated his obligation to seek best execution for securities transactions.

OUR TAKE: The SEC requires advisers to recommend the lowest-expense share class available, which requires more diligence by advisers before making recommendations.  It is also noteworthy that the SEC uses an expansive interpretation of an adviser’s best execution obligations, which historically has centered on brokerage commissions.


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