Thursday, March 1, 2018
Yesterday, the SEC announced a settlement with Ameriprise. The SEC's order explains that Ameriprise disadvantaged retirement plan customers by "selling them more expensive share classes in certain [mutual funds] when less expensive share classes were" also available through Ameriprise. Although not a defense, Ameriprise's spokesperson correctly pointed out that this issue has been "a long-standing industry topic and numerous firms have settled with the SEC and Finra on similar matters."
Many open-ended mutual funds offer multiple share classes. Investors purchasing class A shares typically pay an up-front commission or sales load. The amount of the commission paid varies by fund. Class B and Class C shares generally charge no up-front fees, but hit investors with higher fees over time or with contingent-deferred sales charges if the investors redeem their mutual fund shares before a certain amount of time. In many instances, investors placing large orders can receive bulk discounts (called "breakpoints") on Class A shares. Ameriprise ran into trouble because it did not steer its customers into lower-fee shares when they were available and because it did not disclose that it was steering customers into expensive share classes that paid Ameriprise more money. Overall, investors paid an extra $1.7 million in fees because of Ameriprise's supervisory failures. To its credit, Ameriprise reimbursed those fees "along with $190,797.40" in interest. It also paid another $230,000 as a civil monetary penalty to the SEC to resolve the regulatory issue.
Although the numbers are not huge here, it's good to see the SEC cracking down on the exploitation of retail investors. The order and ongoing problem also show the need for the SEC to use its power under Dodd-Frank to impose a fiduciary duty on broker-dealer firms when they act as financial advisers to retail customers. Notably, the SEC's enforcement here hinges not on what Ameriprise did so much as its failure to disclose to customers that "it would earn greater compensation in recommending . . " certain share classes "because these share classes would generate additional revenue for Ameriprise."