After about 100 other SEC cases involving disclosures of 12b-1 fees in the past three years, a midsize firm resolved the regulator’s allegations that it failed to disclose its conflicts of interest.
O.N. Investment Management, the RIA subsidiary of Cincinnati-based independent brokerage The O.N. Equity Sales Company (Onesco) and insurer Ohio National, breached its fiduciary duty to clients by receiving “third-party compensation from client investments without fully and fairly disclosing associated conflicts of interest,”
The payment represents a fraction of the roughly
Despite brokerage executives’ criticism of the program as a form of
“When you're advising and managing money under the ’40 Act, you always have to act in the best interest of the client,” Straney said. “If you can get equal satisfaction of the investment objectives and risk tolerance in the lower-priced product, you should use the lower-priced product. … Unfortunately, I think it happens all too frequently.”
Onesco didn’t admit or deny the SEC’s allegations as part of settling the case, though it agreed to a censure and a series of undertakings over the next two months to notify the affected clients receiving restitution and put policies in place to prevent violations of the Advisers Act. The brokerage firm’s parent, which is best known as an annuity issuer and life and disability insurance firm, generated $2.2 billion in revenue in 2020,
The alleged violations date back to 2014, though the SEC order noted that Onesco’s RIA began rebating 12b-1 fees to clients in March 2017. In addition to receiving the 12b-1 fees without giving adequate disclosure, Onesco’s RIA collected revenue sharing payments tied to the no-transaction fee funds and the cash sweeps in money market products the firm’s advisors recommended to clients without making those incentives clear in its Form ADV and other disclosures, according to the regulator. Investigators also accused the firm of failing the required duty of care standards for advisory clients.
“By causing certain advisory clients to invest in certain mutual fund share classes when share classes of the same funds were available to the clients that presented a more favorable value under the particular circumstances in place at the time of the transactions, [O.N. Investment Management] violated its duty to seek best execution for those transactions,” the order said.
Under the settlement, Onesco’s RIA will pay disgorgement of $866,257, prejudgment interest of $162,396 and a penalty of $210,000. In Onesco’s last regulatory
Regardless of any individual case, the extra disclosures in Form ADV as a result of the 12b-1 cases and additional explanations in the new Form CRS required by the SEC’s Regulation Best Interest won’t “cure the misconduct” at issue on their own, Straney said.
“The SEC and FINRA and other regulators have made an effort to inform the public,” he said. “The investors are going to rely on the advisor. It starts with them to disclose all material facts. You can have all the regulations you want, but, when it comes down to it, the advisor is key.”