SEC fines AIG units $9.5 million for steering clients to higher-cost products
March 23, 2016 by IFAwebnews Staff
Three units of American International Group (AIG) will pay more than $9.5 million in fines to settle allegations the global insurer steered clients toward more expensive mutual fund share classes in order to collect more fees, according to the U.S. Securities and Exchange Commission.
The units — Royal Alliance Associates Inc., Sagepoint Financial and FSC Securities Corp. — are part of the AIG Advisor Group. The SEC said in a statement that the firms placed clients in share classes that charged fees for marketing and distribution despite the clients being eligible to buy shares in fund classes without those additional charges. As a result, the firms collected about $2 million in extra fees. The firms failed to disclose their conflict of interest in selecting share classes that would generate more revenue for them, the SEC said.
Known as “12b-1 fees,” a reference to the SEC rule that governs them, such charges are typically paid to investment advisers to cover marketing of a fund, which in theory benefits the shareholders by increasing the fund’s value.
The AIG units agreed to the settlement without admitting any wrongdoing.
“Investment advisers must be vigilant about conflicts of interest when selecting mutual fund share classes because the choice may improperly benefit them at the expense of their clients,” said Marshall S. Sprung, Co-Chief of the SEC Enforcement Division’s Asset Management Unit, which has been actively probing conflicts of interest and disclosure around mutual fund share class selection.
According to the SEC’s order instituting a settled administrative proceeding, the AIG affiliates also failed to monitor advisory accounts on a quarterly basis to prevent reverse churning. The firms had compliance policies and procedures to ensure that fee-based or “wrap” advisory accounts that charged an inclusive fee for both advisory services and trading costs remained in the best interest of clients that traded infrequently, but failed to implement those policies and procedures.
“[AIG] Advisor Group is pleased to have reached a settlement with the SEC over two issues it raised that occurred between 2012 and 2014 at three of our affiliates, FSC Securities, Royal Alliance and SagePoint Financial,” an AIG spokesperson said in a statement. “Advisor Group takes compliance with securities regulations seriously and remains focused on serving the best interests of our clients.”
