Failure to Disclose Conflicts Draws Sanctions for Adviser
The question of whether and how to disclose the payment of 12b-1 and similar fees in connection with the acquisition of mutual fund shares has been at the center of a number of Commission actions. It was the central question in the Share Class Selection Initiative which focused on disclosure failures tied to 12b-1 fees. That program was one of the most successful cooperation initiatives conducted by the Division of Enforcement. Additional cases have been brought and resolved on the question. Advisers continue to be named in actions. The most recent of these cases is In the Matter of Oxbow Advisors, LLC, Adm. Proc. File No. 3-19817 (May 29, 2020).
Oxbow is a Commission registered investment adviser. At various points in time, beginning in January 2014 and continuing through 2019, the firm failed to properly disclose the 12b-1 fees. Oxbow advised clients to hold mutual fund share classes that charged 12b-1 fees despite the fact that lower-cost share classes of the same funds were available – many funds will permit clients to exchange shares that carried the fees without charge.
At the beginning of the period, Oxbow disclosed in Form ADV Part 2A, Item 12 that a registered representative of an affiliated broker dealer “may . . . receive a portion of the distribution and Rule 12b-1 fees from the issuers of a limited number of mutual funds . . .” More recently, in March 2017 Oxbow amended its brochure to add disclosure stating that its investment adviser representatives of an affiliated broker-dealer might receive distribution fees and 12b-1 fees which “may create a conflict of interest by giving the Oxbow Supervised Person an incentive to recommend investment or insurance products based on compensation received by the Supervised Person, rather than on the client’s needs.”
The disclosure made by Oxbow is inadequate, the Commission concluded. As an investment adviser, Oxbow owed its clients full and fair disclosure. Here the disclosure made did not provide sufficient detail on the conflict. In addition, the firm failed to maintain policies and procedures to properly implement its disclosure obligations. The firm’s failures violated Advisers Act Sections 206(2) and 206(4).
To resolve the proceedings Respondent agreed to comply with certain undertakings tied to the compliance issues, to the entry of a cease and desist order based on the sections cited in the order and to a censure. The firm also agreed to pay disgorgement in the amount of $200,000, prejudgment interest of $31,958.25 and a penalty of $90,000.