Two firms fined by SEC over 12b-1 fees, revenue sharing, and investment selections

On Behalf of | Sep 16, 2021 | Regulatory Investigations

Financial Advisor reports that two firms have been penalized by the Securities and Exchange Commission over alleged violations pertaining to 12b-1 fees, revenue-sharing, and investment selections for their advisory clients. The companies—Paradigm Wealth Advisors of Bridgewater, New Jersey, and Rothschild Investment Corp. of Chicago—did not admit or deny the charges but did consent to pay over $2.8 million in fines and restitution.

Rothschild was accused of failing to disclose two types of compensation received on its clients’ investments, thus breaching its fiduciary duty to those clients. The compensation included revenue sharing payments from an unaffiliated clearing broker that resulted from cash being swept into certain money market funds when other options were available at a lower cost. Another form of compensation involved 12b-1 fees that were paid to the firm because clients had been placed in more expensive classes of mutual funds and money market funds rather than cheaper alternatives. The commission said that Rothschild did not self report the 12b-1 fees to the SEC.

Rothschild has agreed to pay nearly $1.9 million in disgorgement along with prejudgment interest of about $186,000 and a $400,000 civil penalty. The firm also consented to a censure and a cease-and-desist order.

The SEC found that Paradigm often placed its clients in more expensive mutual funds than less costly funds that were available, and did not disclose those investment selection practices or the conflicts of interests associated with them.

Paradigm allegedly selected more expensive mutual fund share classes for clients that charged 12b-1fees rather than lower-cost share classes of the same funds that would have required the firm to pay a transaction fee.

Paradigm agreed to pay disgorgement of over $343,000, prejudgment interest of nearly $47,000 and a $50,000 civil penalty, while also agreeing to a censure and a cease-and-desist order.

Lewitas Hyman represents financial professionals, financial institutions and investors in investment loss, employment and disclosure matters, and in regulatory investigations. Contact us by phone at (312) 291-4600 or through our online contact form for a free consultation.

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