SunTrust Banks unit settles mutual fund fee case

Sep 20, 2017
Firm alleged to have improperly recommended more expensive mutual share classes

The investment services subsidiary of SunTrust Banks has agreed to pay more than $1 million to settle allegations that it collected fees from clients by improperly recommending more expensive mutual share classes when cheaper shares of the same funds were available.

Atlanta-based SunTrust Investment Services (STIS), without admitting or denying wrongdoing, will pay a penalty of more than $1.1 million and disgorge more than $34,000 to settle the civil charges. More than 4,500 accounts were affected, according to the SEC.

‘SunTrust made self-serving investment recommendations to the detriment of everyday investors who rely on mutual funds to secure their financial futures,’ Aaron Lipson, associate regional director for enforcement in the SEC’s Atlanta office, says in a statement. ‘The story has a happy ending for customers with the extra fees back in their accounts, and an obvious lesson for investment advisory representatives [IARs] that you must always recommend the best deal for your clients, not yourselves.'

‘CONFLICTS OF INTEREST’
According to the SEC, STIS between December 27, 2011 and around June 30, 2015 breached its fiduciary duty to its advisory clients, made inadequate disclosures that failed to explain certain conflicts of interest, and had deficiencies in its compliance policies and procedures in connection with its mutual fund share class selection processes.

Specifically, the agency alleges in the settled administrative proceeding that during the time at issue, STIS IARs bought, recommended or held ‘investor class’ or ‘Class A’ mutual fund shares for advisory clients when less-expensive ‘institutional class’ or ‘Class I’ shares of the same mutual funds were available.

The SEC notes in the filing that an important distinction between Class A and Class I shares is that the former often carry marketing and distribution fees, known as 12b-1 fees, which are paid by a mutual fund out of its assets and passed back as compensation to STIS by the fund’s distributor. STIS then shares a portion of the 12b-1 fees with its IARs – who are also registered representatives of the firm, the SEC states, adding that 12b-1 fees on Class A shares are typically as much as 25 basis points per year for an advisory client.

The agency says the affected STIS clients held either discretionary or non-discretionary wrap-fee investment accounts offered through certain STIS advisory programs that offered clients varying investment options, including numerous mutual funds with both Class A shares and lower-cost Class I shares.

During the period at issue, STIS and its IARs received at least $1,148,071.77 in avoidable 12b-1 fees paid by the funds in which the advisory clients were invested, according to the commission. These 12b-1 fees, it alleges, decreased the value of the clients’ investments in the mutual funds and increased the compensation paid to STIS and its IARs.

STIS did not adequately inform its advisory clients of the conflicts of interest presented by its IARs’ share class selections and the receipt by STIS and the IARs of 12b-1 fees, according to the SEC. It acknowledges that the firm disclosed in its Form ADV Part 2A brochures that it ‘may’ receive 12b-1 fees as a result of investments in certain mutual funds and – for several STIS programs – that such fees presented a ‘conflict of interest’. But it says STIS did not disclose in these brochures or otherwise that many mutual funds offered a variety of share classes, including some that did not charge 12b-1 fees.

‘The failure by STIS to make adequate disclosures concerning its IARs’ share class selections was misleading to investors in light of STIS investing its clients in more expensive mutual fund share classes when lower-cost options of the same funds were available,’ officials write in the filing. ‘Additionally, STIS’ practice of investing clients in mutual fund share classes with 12b-1 fees rather than lower-fee share classes was also inconsistent with STIS’ duty to seek best execution for its clients.’

REMEDIAL EFFORTS
The SEC can take into account a respondent’s efforts to mitigate the effects of alleged wrongdoing when it reaches a settlement. In this situation, the commission considered remedial acts taken by STIS including that, effective July 1, 2015, it began crediting any newly incurred 12b-1 fees back to clients in all asset management consulting (AMC) advisory accounts at issue while the firm worked to convert existing investments in Class A shares to Class I shares, where available.

In addition, the SEC says the firm’s investment policy committee required all non-qualified AMC accounts opened before July 1, 2015 to be reviewed, and – if any such account had not already been converted via the Class A to Class I conversion project – the STIS IARs were ‘responsible for converting all current mutual fund positions held within the account to the most cost-effective share class available to the client by December 31, 2015.’

Among other things, the agency says that, after the division of enforcement began its investigation into the matter, STIS voluntarily began rebating affected non-qualified client investment accounts for the avoidable 12b-1 fees incurred during the relevant period.

A SunTrust spokesperson says in a statement: ‘We addressed the matter on a prospective basis with remedial actions starting in the summer of 2015. We co-operated fully with the SEC and are pleased to have settled this matter.’

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