SEC Settles With Investment Adviser Whose Associated Persons Received 12b-1 Fees from Unaffiliated Broker-Dealer

The Securities and Exchange Commission accepted an offer of settlement from Graham, Bordelon, Golson & Gilbert, Inc. (“Graham Bordelon”), an investment adviser with its headquarters is Monroe, Louisiana.

This settled action is markedly different from the roughly hundred other actions involving share class selection practices to date. In this action, the SEC alleged that Graham Bordelon “purchased, recommended, or held for advisory clients mutual fund share classes that charged fees pursuant to Rule 12b-1 under the Investment Company Act of 1940 (“12b-1 fees”) instead of lower-cost share classes of the same funds which were available to the clients. Graham Bordelon’s associated persons received 12b-1 fees in connection with these investments, but Graham Bordelon did not adequately disclose this conflict of interest in its Forms ADV or otherwise. Graham Bordelon also, by causing certain advisory clients to invest in fund share classes that charged 12b-1 fees when share classes of the same funds that presented a more favorable value for these clients under the particular circumstances in place at the time the transactions were available to the clients, breached its duty to seek best execution for those transactions.”

This case is unique for a few reasons. First, Graham Bordelon did not have an affiliated broker-dealer during the relevant period. Instead, all of Graham Bordelon’s associated persons were registered representatives of an unaffiliated broker-dealer. However, the SEC still brought charges against Graham Bordelon.

Second, Graham Bordelon agreed to pay disgorgement of $111,655.10 and prejudgement interest of $14,744.11, even though the SEC acknowledged that Graham Bordelon began providing credits of the 12b-1 fees it received dating back to August 31, 2016. This seems like a fairly large figure for a firm that manages approximately $240 million with a period that is shortened due to the statute of limitations and their crediting process. Based on some back-of-the-napkin math, it appears to be about a one-year period (i.e., from September 1, 2015 through August 31, 2015). This assumes that the SEC Staff did not enter a tolling agreement with Graham Bordelon fairly early in the enforcement inquiry.

Third, the Graham Bordelon agreed to pay a civil penalty of $50,000, which is almost half as large as the disgorgement at hand. By comparison, Cozad Asset Management, Inc. was ordered to disgorge $369,423.75 and agreed to a $10,000 civil penalty. Albeit, they missed the self-reporting deadline by a few days. The SEC accepted civil penalties that appear to be a bit less than half of the ordered disgorgement in other settled actions.

Lastly, it begs the question where the SEC Staff will draw the line in pursuing cases involving associated persons and unaffiliated broker-dealers. For example, if a single, non-control person received 12b-1 fees, it would seem unfair to seek disgorgement from the investment adviser. Obviously, the SEC could allege failures in policies and procedure and disclosure in those instances, but that would set some interesting precedent.

As an aside, I still continue to believe that best execution is the incorrect framework for these cases, as the investment advisers (i) purchased the security they intended, (ii) at the time they intended , and (ii) at the price they intended.

As an update to this article, there has been one other settled enforcement action involving similar facts. See Signature Financial Services, Ltd.

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