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SEC charges SunTrust with improperly recommending higher-fee mutual funds

Chris Hamblin, Editor, London, 18 September 2017

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The US Securities and Exchange Commission has accepted an offer of settlement from SunTrust Investment Services to pay a penalty of more than US$1.1 million to settle charges that its subsidiary collected avoidable fees from HNW customers by improperly recommending needlessly expensive share classes of various mutual funds.

SunTrust Investment Services Inc, whose headquarters lie in Atlanta in Georgia, was registered with the SEC as both a broker-dealer and investment advisor between December 2011 and June 2015, when the alleged misconduct happened. At all relevant times, it has been a wholly-owned non-banking indirect subsidiary of SunTrust Banks Inc, a bank holding company. 

During that time, SunTrust investment advisor representatives (IARs) purchased, 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 funds were available. More than 4,500 accounts were affected. Class A shares often call for the continual payment of marketing and distribution fees ('12b-1 fees' imposed in accordance with s12(b) Investment Company Act 1940 and Rule 12b-1). The mutual fund in question pays the out of its assets and the fund’s distributor then passes those fees on as compensation to SunTrust, which thereupon shares a portion of them with its advisors. For Class A shares, an advisory client normally pays as much as 25 basis points per annum for these 12b-1 fees. The affected HNWs held either discretionary or non-discretionary wrap-fee investment accounts offered through certain SunTrust advisory programmes. These programmes offered clients varying investment options, including numerous mutual funds with both Class A shares and cheaper Class I shares. In 2011-15 SunTrust and its IARs received at least $1,148,071.77 in avoidable 12b-1 fees paid by the funds in which the advisory clients had invested. The IARs apparently call them “trailing fees” or “trailers.”

The SEC claims that SunTrust (which does not admit the regulator's findings) willfully broke ss206(2), 206(4) and 207 Advisors Act and Rule 206(4)-7 issued thereunder. Section 206(2) of the Act prohibits every investment advisor, directly or indirectly, from engaging “in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client.” Even when the SunTrust subsidiary began to convert the Class A shares held by 'legacy' advisory clients in non-qualified accounts to Class I shares in 2013 (a project known as the “A to I share conversion”) it dragged its heels. Some HNW clients did not have their Class A shares converted until 2015.

Form ADV is the uniform form used by investment advisers to register with both the SEC and state securities authorities. The 'cease and desist' order that deals with SunTrust Investment Services states that the firm omitted crucial data in the forms it sent to the SEC. It said in its Form ADV Part 2A brochures for the wrap-fee advisory programmes that it 'may' receive 12b-1 fees as a result of investments in certain mutual funds.

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