The U.S. Securities and Exchange Commission (SEC) recently announced charges against three American International Group Inc. (NYSE: AIG) affiliates for steering mutual fund clients toward more expensive share classes so the firms could collect more fees.
The firms agreed to pay over $9.5 million to settle the SEC’s charges. The three firms – Royal Alliance Associates, SagePoint Financial and FSC Securities – consented to the SEC’s order without admitting or denying the findings.
The investigation by the SEC found that the firms placed clients in share classes that charged fees for marketing and distribution despite the clients being eligible to buy shares in fund classes without those additional charges.
As a result, the firms collected roughly $2 million in extra fees. The firms failed to disclose their conflict of interest in selecting share classes that would generate more revenue for them.
According to the SEC, the AIG affiliates also failed to monitor advisory accounts on a quarterly basis to prevent reverse churning. The firms had compliance policies and procedures to ensure that fee-based or “wrap” advisory accounts that charged an inclusive fee for both advisory services and trading costs remained in the best interest of clients that traded infrequently, but failed to implement those policies and procedures.
Marshall S. Sprung, co-chief of the SEC Enforcement Division’s Asset Management Unit, commented:
Investment advisers must be vigilant about conflicts of interest when selecting mutual fund share classes because the choice may improperly benefit them at the expense of their clients.
Shares of AIG were trading down 1.4% at $52.15 on Tuesday, with a consensus analyst price target of $63.28 and a 52-week trading range of $50.20 to $64.93.
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