On September 14, 2017, the SEC settled charges against SunTrust Investment Services (SunTrust), a dual registered broker-dealer and investment adviser, related to SunTrust’s collection of more than $1.1 million in allegedly improper fees over the course of approximately 3.5 years, from clients who invested via either discretionary or nondiscretionary wrap fee investment accounts offered through certain SunTrust advisory programs. The SEC made several allegations: (1) SunTrust and its registered representatives inappropriately invested client assets into certain mutual fund share classes when share classes with lower fees were available; (2) SunTrust did not adequately disclose the potential conflicts of interest presented by such share class selection; and (3) SunTrust’s policies and procedures were not reasonably designed to prevent violations of the federal securities laws in connection with such share class selection. SunTrust’s conduct was discovered during an SEC compliance exam and referred to SEC enforcement. SunTrust began reimbursing affected clients, with interest, prior to the SEC’s enforcement investigation.
The SEC alleged that SunTrust’s registered representatives, for SunTrust’s advisory clients, purchased, recommended or held Class A shares of certain mutual funds when Class I shares of the same funds were available. Class A shares have 12b-1 fees, which are ongoing marketing and distribution fees, whereas Class I shares have no such fees.
The SEC further alleged that SunTrust did not adequately inform its advisory clients of the conflicts of interest presented by the share class selection and the receipt by SunTrust and its registered representatives of the 12b-1 fees. SunTrust disclosed in its Form ADV Part 2A brochures that SunTrust “may” receive 12b-1 fees as a result of investments in certain mutual funds and that such fees presented a “conflict of interest.” However, the SEC stated that neither the Form ADV Part 2A brochures nor SunTrust’s other disclosure documents stated that many mutual funds offered shares that did not charge 12b-1 fees. Further, the SEC alleged that none of SunTrust’s disclosures stated that a SunTrust registered representative could purchase, hold or recommend—and sometimes did purchase, hold or recommend—mutual fund investments in share classes that paid 12b-1 fees to SunTrust, which SunTrust ultimately shared with its registered representatives as compensation, even though such clients also were eligible to invest in share classes of the same mutual funds that did not charge such fees and were less expensive.
The SEC order stated that, over time as Class I shares became increasingly available to non-institutional investors, SunTrust did not update its compliance policies and procedures to require its registered representatives to identify or evaluate available institutional share classes. Further, the SEC alleges that SunTrust did not update or enhance its policies or procedures to address instances where its registered representatives were recommending, purchasing or holding Class A shares when less costly Class I shares were available. As a result, the SEC alleged that SunTrust failed to adopt and implement written policies and procedures reasonably designed to prevent violations of the federal securities laws in connection with the share class selections of its registered representatives.
The SEC’s order found that SunTrust violated Sections 206(2), 206(4) and 207 of the Investment Advisers Act of 1940 and Rule 206(4)-7. Without admitting or denying the findings, SunTrust agreed to pay the penalty totaling $1,148,071.77 as well as disgorgement plus interest on any leftover amount of the avoidable 12b-1 fees that were refunded to clients. The firm also agreed to be censured.
The SEC’s order is available at: http://www.sec.gov/litigation/admin/2017/34-81611.pdf