A large broker-dealer agreed to pay over $3.8 Million in disgorgement, fines, and interest for recommending and selling mutual fund share classes that had higher expenses than otherwise available share classes. The SEC asserts that, during a 5-year span, the respondent disadvantaged over 4500 retirement and charitable clients that could have purchased low-cost institutional or load-waived shares. The SEC alleges that the firm failed to fully disclose how it benefitted by receiving unnecessary 12b-1 fees and how the increased expenses impacted investor returns. The SEC faults the BD for not having “adequate systems and controls in place to determine whether retirement plans and charitable account customers were eligible” to purchase lower-expense share classes.
The SEC does not (have to) allege that the firm intentionally misled or harmed clients. Instead, the regulator can rely on the outcome that clients were in fact harmed, and, therefore (res ipsa loquitur), the firm failed to implement compliance systems to prevent it from recommending the wrong share classes. The SEC does not need to prove an evil heart or even carelessness to bring an enforcement action.