Michigan Firm Slammed Over Undisclosed 12b-1 Conflicts
The Securities and Exchange Commission ordered Sigma Planning Corp., an Ann Arbor, Michigan RIA affiliated with two independent broker-dealer firms, to pay $2.5 million for failing to disclose to customers that they could have bought less expensive mutual fund shares.
Sigma, which has around 700 dually-registered advisors and manages $3.6 billion in client assets, also concealed that it had put advisory clients into alternative investment funds that paid marketing fees for access to its brokers and advisors.
The sanctions continue a long-running campaign by the SEC and the Financial Industry Regulatory Authority to clamp down on mutual fund sales abuses.
Finra in March imposed a $100,000 fine against Sigma for failing to properly supervise sales of leveraged and inverse exchange-traded funds at its broker-dealers, Parkland Securities and Sigma Financial Corp.
The multi-million-dollar SEC sanction is a sizable fine for a small firm. The same day it was announced, the regulator said it reached a $225,000 settlement with Morgan Stanley for allegedly recommending 135 municipal bond trades that had no economic benefit to customers.
John McClellan, Sigma’s chief compliance officer, declined to comment on the SEC order, which the 36-year-old company accepted without admitting or denying the findings.
In fining the RIA unit, the SEC said it breached its fiduciary duty by collecting the distribution fees without proper disclosure and also functioned as an unregistered broker by accepting transaction-based compensation in the form of the 12-b1 distribution fees. Sigma Planning Corp. did not share the fees with its investment adviser representatives, the SEC said.
In a March disclosure document, Sigma Planning said that it ended a program under which Fidelity Investments’ National Financial Services, its custodian, had been sharing 12b-1 fees with Sigma.
The SEC began its review of Sigma in 2016, according to the document.
The SEC for more than a decade has been pursuing brokers over failure to sell less expensive mutual fund share classes or apply discounts made available from fund companies. Last year it introduced a program that waived penalties for dually registered investment broker-dealers that self-disclosed and agreed to remedy mutual fund share-class abuses. The initiative resulted in $125 million reimbursements from 79 investment advisory firms.
The muni bond sanction imposed on Morgan Stanley involved recommendations to retail customers to sell securities and purchase identical other bonds with “no apparent economic benefit” to the customer, according to the SEC order. The transactions, which took place from June 2013 through December 2017, generated $340,000 in commissions and fees for Morgan Stanley Smith Barney, the SEC said.
The firm reimbursed the clients with interest during the course of the SEC investigation, the regulator said.
“We are pleased to have resolved this matter,” said a Morgan Stanley spokeswoman.