SEC Sanctions Crown Capital Securities LP for Mutual Fund Overcharges & Revenue Sharing
According to a filing this week, the Securities and Exchange Commission has ordered Crown Capital Securities LP, a dually registered investment adviser and broker-dealer based in Southern California, to pay nearly $1.6 million to settle charges that it breached its fiduciary duties related to its mutual fund share class selection practices and undisclosed revenue sharing arrangements it had with certain unaffiliated clearing brokers.
The SEC alleges that since at least 2014, Crown Capital recommended that clients purchase or hold mutual fund share classes that charged 12b-1 fees when lower-cost share classes of the same funds were available. This led to the firm receiving fees that it would not have collected had its advisory clients been invested in the available lower-cost share classes of those funds.
Further, the firm allegedly failed to disclose a revenue sharing arrangement it had with unaffiliated clearing brokers that offered a no-transaction fee (NTF) platform, which provided Crown Capital access to certain mutual funds. The clearing brokers apparently shared a percentage of the NTF revenue with Crown Capital when its clients invested in a mutual fund on the platform.
The SEC found that the Crown Capital also had a revenue sharing arrangement with a clearing broker for cash sweep money market funds, which are accounts used by brokerages to hold uninvested cash until the investor or their adviser decides how to invest the money.
Although the clearing broker made several funds available that would have paid Crown’s clients higher yields, the firm predominantly recommended and invested in money market funds that paid the highest revenue sharing, according to the SEC.
Crown Capital also allegedly failed to self-report mutual fund sales misconduct under the share class selection disclosure initiative, which gave advisers until June 2018 to self-report in exchange for more favorable settlement terms, including no civil penalties.
The SEC’s sanctions for Crown Capital include disgorgement of $1.14 million, prejudgment interest of $154,200, and a $295,000 civil penalty.
The firm will also be required to review and correct relevant disclosure documents concerning mutual fund share class selection and 12b-1 fees, sweep account revenue sharing, and NTF revenue sharing, as well as evaluate whether existing clients should be moved to a lower cost mutual fund share class, alternative cash sweep product, or mutual funds that do not include NTF revenue.
Potential Lawsuits to Recover Financial Losses
The foregoing information, which is all publicly available, is being provided by The White Law Group. If you are concerned about investments with Crown Capital LP,, please call the securities attorneys at The White Law Group at 888-637-5510.
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