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Royal Alliance, SagePoint and FSC Securities Fined $9.5 Million for Selling Customers Higher-Priced Products

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On March 16, 2016, registered FINRA members, Royal Alliance Associates, Inc., SagePoint Financial, Inc. and FSC Securities Corporation (all indirectly owned by American International Group, Inc. (“AIG”)) consented to the entry of an Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934 and Sections 203(e) and 203(k) of the Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (the “Order” – SEC Order).

The Order was the result of an Offer of Settlement made by Royal Alliance, SagePoint and FSC in anticipation of such proceedings by the SEC. Royal Alliance, SagePoint and FSC had multiple compliance failures and breaches of fiduciary duty related to their registered investment advisory business. From at least 2012 to 2014, Royal Alliance, SagePoint and FSC invested their advisory clients in mutual fund share classes with 12b-1 fees instead of lower-fee share classes of the same funds available without 12b-1 fees. More specifically, the firm’s advisory clients affected by said misconduct were invested in a fee-based advisory service called “Advisor Managed Portfolio” (“AMP”). When a clients was invested in the AMP in a qualified retirement or ERISA account, 12b-1 fees were rebated. Thus, by investing non-qualified advisory clients in the higher-fee share class, Royal Alliance, SagePoint and FSC acted as a broker-dealer and received 12b-1 fees they would not have otherwise collected from the lower-fee share classes. According to the Order, those firms received at least $2 million from this practice. Moreover, they failed to disclose the conflict of interest that existed due to the financial incentive to place non-qualified advisory clients in the higher-fee investments, which also resulted in breaches of their fiduciary duties. Additionally, the Order found compliance deficiencies related to mutual fund share class selection and to the failure to implement compliance policies and procedures to monitor for “reverse churning.” Reverse churning is the practice where a customer is charged a wrap fee to cover all advisory services and trading costs even though the client rarely makes trades. In such circumstances, a wrap fee may not be in the best interest of the customer when compared to a non-wrap fee account or a traditional brokerage account where the trading costs are paid as incurred (i.e., commissions).

Royal Alliance, SagePoint and FSC are all dual-registered broker-dealers and investment advisory firms. What that means is that Royal Alliance, SagePoint and FSC are registered with the SEC (because they manage assets $100 million or greater – otherwise they would only be registered with a State), but they are also registered FINRA members. And, since studies have shown that investors do not understand the difference between a broker-dealer and an investment advisory firm, FINRA has given such firms the authority and the obligation to supervise all investment-related conduct without regard to whether it is the broker-dealer “side” or the investment advisory “side.” As of February 25, 2013, the effective date of revised Rule 8210 (Provision of Information and Testimony and Inspection and Copying of Books), FINRA made it clear that the scope of FINRA’s authority extended to all member firms, associated person and persons subject to FINRA’s jurisdiction. Supplementary Material .01 to Rule 8210 also specifically addresses the fact that the broad scope of books, records and accounts covered by Rule 8210 includes records such as those related to FINRA investigations of outside business activities (“OBA”), private securities transactions, other FINRA rules and federal securities laws. FINRA has specifically explained that all “associated persons” under FINRA rules are not necessarily “registered persons” under state or federal securities laws and yet, Rule 8210 applies equally to both. See FINRA Regulatory Notice 13-06.

Lambert Law Firm, LLC represents investors in the recovery of financial losses caused by investment fraud and misconduct. If you have lost money due to bad conduct by an investment advisor or brokerage firm, contact Marnie C. Lambert at 1-844-32FRAUD for a free consultation regarding your legal rights and options.

Prohibited Pay-to-Play Arrangement Between Government Investors and Custodial Bank Executive Results in $12 Million Settlement

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Last week, the Securities and Exchange Commission (“SEC”) issued a press release announcing a settlement it had reached with State Street Bank and Trust Company for a “pay-to-play” arrangement it had with a former deputy treasurer in Ohio (SEC Press Release).  A pay-to-play scheme is achieved when someone affiliated with a bank or investment fund bribes (or otherwise monetarily “incentivizes”) a decision-maker for a government investor to throw lucrative business the way of the bank or investment fund.  Of course, as with most illegal activities, the trickiest part of the scheme is not getting caught.  Here, the players got caught.

According to the SEC, State Street’s former senior vice president and head of the public funds group at State Street, Vincent DeBaggis, had an agreement with a former deputy treasurer for Ohio, whereby Ohio entered into lucrative investment-related contracts with State Street in exchange for prohibited cash payments and campaign contributions made by DeBaggis on behalf of State Street (State Street Order).  State Street has agreed to pay $4 million for disgorgement and prejudgment interest and $8 million as a penalty.

The SEC also reached a settlement with DeBaggis for the same misconduct.  For his part, DeBaggis must pay disgorgement of $150,000, plus prejudgment interest of $24,202.81, as well as a penalty of $100,000 (DeBaggis Order).  Just last week, the SEC filed a Complaint against lawyer and lobbyist charging him for his involvement in the pay-to-play scheme (Complaint).  According to the SEC, the Ohio players from the treasurer’s office were criminally convicted for other misconduct and are in federal prison.