SEC fines hybrid RIA $750,000 for mutual fund revenue sharing

A Chicago RIA was penalized for failing to disclose revenue-sharing payments received by an affiliated broker and for placing clients in more expensive share classes than necessary.

The RIA, Mesirow Financial Investment Management (MFIM), settled with the Securities and Exchange Commission (SEC) without admitting or denying the findings. The alleged violations occurred approximately four years before June 2019, when MFIM revised its disclosures. During an ongoing review by the SEC, the company has embarked on a process to move its clients to lower-cost share classes at the end of 2018, in accordance with the July 22 order.

As a result of investments by MFIM’s advising clients in certain mutual funds, affiliated broker Mesirow Financial received income from an unaffiliated clearing broker. The clearing broker charged higher recurring fees for certain families of funds, and a portion of those fees were shared with Mesirow Financial, according to the SEC.

Mesirow agreed to a fine of $752,834, which includes $487,862 in restitution paid to investors, $94,972 in interest and a civil penalty of $170,000.

The firm did not respond to a request for comment.

Although MFIM disclosed prior to June 2019 that its affiliated broker may receive 12b-1 marketing and distribution fees from certain mutual funds, the SEC deemed this disclosure “inadequate” because the RIA did not disclose the broker’s receipt of revenue sharing and associated disputes.

Additionally, pursuant to the SEC’s order, the company did not disclose that lower-cost mutual fund stocks were available to customers.

The SEC order was issued the same day that affiliate LPL Private Advisor Group was fined $5.8 million for 12b-1 violations.

Led by Executive Chairman Richard Price, Mesirow manages about $43.3 billion in total regulatory assets, according to its latest Form ADV filings.

In its latest June 27 Form ADV brochure, the company said it was “fully cooperating with the SEC’s investigation” and discussing a potential settlement at the time.

“Based on information currently known to MFIM, MFIM does not believe that the potential SEC investigation or settlement will have a material adverse effect on its business or financial condition,” the company disclosed in its filing.

Dolores W. Simon