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Double Dipping

How One Firm’s Decisions Had a Big Impact On Their Bottom Line
Wednesday, September 23, 2020

On September 10, 2020, the SEC issued an order instituting administrative proceedings and cease-and-desist proceedings against Graham, Bordelon, Golson & Gilbert, Inc. (GBGG), along with a civil penalty of $176,399.21, for their violations of Section 206(2) of the Advisers Act.

According to the SEC, their mutual fund share class selection practices violated their fiduciary duty by failing to ensure best execution. They failed to disclose conflicts of interest related to their selection practices, and they willfully violated the Advisers Act by deceiving their clients into purchasing high-cost share classes that would benefit the representatives of GBGG.

GBGG Is an investment advisory firm based in Monroe, Louisiana. Between March 2014 and August 2016, GBGG recommend, held, and purchased mutual fund share classes that charged fees on operating expenses pursuant to Rule 12b-1 of the Investment Company Act (12b-1 fees).

This type of purchase is acceptable as long as there are no less expensive alternatives; however, Class I shares (which do not charge 12b-1 fees) were available for the same funds.

Class I shares will, in the majority of cases, have lower expenses (and higher returns) than a share class that charges 12b-1 fees. Therefore, it is almost always in the client’s best interest to choose a Class I over a 12b-1 share class if they are available.

GBGG’s failure to seek low-cost share classes, in and of itself, would have violated GBGG’s duty to seek best execution, so why did they do it?

In addition to failing to seek best execution, it turns out they also failed to disclose relevant conflicts of interest. Chief among their undisclosed conflicts was the fact that many representatives of GBGG were also employed by the same broker-dealer that received 12b-1 fees from the higher-cost share classes.

According to the SEC, representatives of GBGG intentionally chose the higher-cost share classes so they could receive the 12b-1 fees on the broker-dealer side without ever disclosing their affiliation with the broker-dealer.

As a result, the SEC issued a cease and desist order against GBGG, censured them, and issued a $176,399.21 civil penalty.

In addition, they were ordered to reimburse their clients for the 12b-1 fees and to seek lower-cost share classes within 30 days. They were also ordered to update their disclosure documents and supervisory procedures to address this and other potential violations of the Advisers Act that may occur in the future.

With the implementation of Reg BI earlier this year, regulators are paying even closer attention to advisers’ decisions and how they impact their clients’ best interests. If you are uncertain about your duties and what you need to disclose, please do not wait until the SEC is knocking on your door. If there is a question or concern about whether a disclosure might be necessary, talk to a compliance consultant about how to discern your best course of action.

About Red Oak Compliance Solutions

Red Oak Compliance Solutions is the global advertising review software of choice in the financial services industry, serving clients with more than $19 trillion in assets under management. Red Oak’s advertising compliance review software offers quick implementation timelines, as well as agile technology that responds to client needs and is 100% Books and Records compliant. Clients of Red Oak typically see at least 35% faster approvals, and 70% fewer touches or better.

About Red Oak Compliance Solutions

Red Oak Compliance Solutions is a leading provider of intelligent compliance software, offering a range of AI-powered solutions designed to help firms of all sizes successfully navigate the increasingly complex regulatory landscape. Our suite of 17(a)-4/WORM compliant features offer risk minimization, cost reduction, and process optimization capabilities with features that are designed to evolve with our client’s needs. Our flagship advertising review software enables firms to deliver compliant content to the market with confidence, faster. Our Disclosure Management and Intelligence solution simplifies the management of disclosures, while our Registration Management solution automates and streamlines the licensing and registration process, further enhancing your internal processes. 

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