Avantax and the SEC to settle first class allegations of global mutual fund shares

Avantax will pay more than $16 million in restitution and penalties to settle charges with the Securities and Exchange Commission for which 1st Global Advisors recommended mutual fund share classes to clients without disclosing conflicts or disclosing that more affordable options were available.

Parent company Blucora formed Avantax Wealth Management in 2019 by combining HD Vest Financial Services and 1st Global. According to the SEC order detailing the chargesAvantax reported over $30 billion in assets under management (Blucora’s total wealth management segment exceeds $87 billion in total client assets, according to Avantax).

Mutual funds often include different types of share classes, offering similar objectives but a different fee structure. This can lead to situations where advisors recommend investing in a particular share class that would include additional fees (such as 12b-1 fees) that decrease returns for investors while increasing profits for the advisor and their broker. affiliated.

According to the SEC, beginning in January 2014, 1st Global Advisors began recommending clients buy and hold mutual fund share classes charging a 12b-1 fee when lower-cost options same funds were available. 1st Global’s affiliate broker would receive 12b-1 fees on these investments, according to the SEC. 1st Global was under an obligation to disclose this conflict because it could affect the client/advisor relationship and color the advice it offered.

While recommending these share classes, 1st Global disclosed the 12b-1 fee receipt to clients, but did not disclose the conflicts that arose from such a recommendation when a more affordable option was available. The disclosures identified a “potential” conflict of interest, but the committee felt this was insufficient because there was an actual conflict at play when recommending the share class options.

Beginning in April 2018, 1st Global began refunding fees to clients who paid them, and since then the company has converted advisory account funds held in these share classes to more affordable share class options. in the same mutual funds, according to the SEC.

The SEC claimed that 1st Global Advisors also recommends income-generating mutual funds with no transaction fees for its broker affiliate, as well as cash sweep products in which the broker affiliate benefits from revenue sharing. The SEC also argued that the company did not itself flag its share class recommendation conflicts during the SEC’s investigation. Share Class Selection Disclosure Initiative (The SEC’s Enforcement Division has since sued other companies who also did not report receiving 12b-1 charges after similar stock class recommendations).

In settling the charges, Avantax did not admit or deny the findings, but agreed to pay investors approximately $12.4 million in damages, plus an additional $2.5 million in interest and $2 million in dollars in civil penalties to remedy breaches in disclosures. According to Avantax Wealth Management President Todd Mackay, the company was aware of the self-disclosure initiative prior to acquiring 1st Global and had reserved a reservation related to the matter after completing the acquisition.

“While we are disappointed that the SEC demanded a penalty based on conduct that occurred prior to our ownership of 1st Global, we are nonetheless pleased to have worked closely with the SEC to resolve this matter,” said Mackay said.

Dolores W. Simon