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SEC charges investment advisor and its compliance officer over share class selection

Chris Hamblin, Editor, London, 18 May 2020

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The US Securities and Exchange Commission has charged the registered investment advisory firm of Ambassador Advisors in Pennsylvania with breaching its fiduciary duty when selecting mutual fund share classes. It has also charged Adrian Young, 43, who has been an investment advisor representative and chief compliance officer of the firm since 2011.

Young owns 50% of Ambassador Advisors (regd 2002) and owned one-third of the firm during the relevant period, which ran between 2014 and 2018. Along with him and his firm, the SEC has charged his fellow part-owners and executives, Bernard Bostwick, 58, and Robert Kauffman, 65.

According to the SEC, the firm and its principals invested their advisory clients in mutual fund share classes that charged 12b-1 fees when cheaper share classes of the same funds were available to those clients. Bostwick, Kauffman, and Young received additional income in the form of 12b-1 fee revenue.  Young received 24-9% of the 12b-1 fee revenue derived from mutual fund investments in the clients' accounts during the relevant period. Because Ambassador Advisors had discretionary authority over its advisory accounts, it regularly made and executed decisions about investments on behalf of its clients without prior notification or approval.

At all times, the firm's compliance manual claimed that the firm and its executives were fiduciaries and that any of them who recommended securities to advisory clients “must scrupulously avoid serving their own personal interests ahead of the Company’s Advisory Clients,” and “[a]s fiduciaries,” they “must at all times” “[p]lace the interests of advisory clients first.” The SEC has a long history of holding firms to their own internal policies and wants to do so here.

The SEC adds that the company and its men also abrogated their fiduciary duty by failing to tell their clients enough about the conflict of interest inherent in these transactions. To be precise, they did not state that, even though share classes of mutual funds without 12b-1 fees were available to their advisory clients, they were going to select share classes of the same mutual funds with continuing 12b-1 fees, lowering the clients’ returns and generating additional revenue for the compliance officer and his colleagues.

The SEC accuses the defendants of breaking (and, if the federal court for the eastern district of Pennsylvania does not stop them, of continuing to break) section 206(2) Investment Advisors Act 1940 and the firm of breaking section 206(4) and Rule 206(4)-7 enacted thereunder. It wants the court to force them to disgorge all ill-gotten gains and pay prejudgment interest thereon and to pay a civil penalty.

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