A Colo.-based registered investment advisor settled charges with the Securities and Exchange Commission this week alleging that one of the firm’s registered reps recommended purchasing particular unit investment trusts (UITs) and shares of certain mutual funds while not informing the clients more affordable and identical versions were available.
In addition to the settled charges, the SEC argued that the fir and representative Craig L. Carson breached the fiduciary duty they had to those individuals.
According to the order, Intervest was located in Colorado Springs, Colo., and has been SEC-registered since 2006, with about $236 million in managed assets as of the end of last year. Carson has decades of experience in the industry, and has been affiliated with Intervest for more than 15 years, according to his FINRA BrokerCheck profile.
Between April 2016 and Aug. 2019, the RIA was offering a number of different portfolio management services with an AUM-based fee. According to the settlement, Carson recommended unit investment trusts that included a sales charge ranging from 2.75% to 3.95% of the unit’s IPO price. But for those UITs sold to clients already paying fees for advisory services to an RIA, there were alternative “fee account units,” which charged only a 50 basis point fee and did not include the sales charge, according to the SEC.
“Thus, for advisory client accounts, including the Intervest accounts managed by Carson, it was in the clients’ best interests to purchase the less expensive Fee Account Units,” the settlement read. “During the Relevant Period and on behalf of certain advisory client accounts, Carson recommended and purchased Standard Units even though the accounts were eligible to purchase the UITs’ identical, but less expensive, Fee Account Units.”
Similarly, Carson also allegedly recommended Class A shares for two mutual funds and one interval fund with front-end sales loads totaling as much as 5.75% of the investment, but there were also more affordable and largely identical versions of those shares. Like the UITs, these lower-cost versions of the shares were available to fee-paying accounts via an RIA, or those accounts that cleared through the clearing broker used by Intervest International Equities Corporation (IIEC), Intervest’s wholly owned subsidiary.
In total, the advisory accounts paid more than $214,600 on avoidable sales charges for the UITs, and nearly $163,690 in avoidable front-end sales loads on the Class A Shares, the SEC argued. Carson received about 70% of those totals, according to the settlement.
The fees charged on UITs when lower-cost options were allegedly available has been a hot-button issue for the SEC, according to Martin Berliner, the attorney representing Intervest International. According to Berliner, the company had been in communication with the SEC for the better part of a year about the issue, and after looking at other settlements as well as a case in which the commission pursued litigation and prevailed on similar allegations, they decided it best to settle on “mutually acceptable” terms.
“They’ve basically done a sweep to determine which broker/dealers have engaged in this activity, and have suggested that if those b/ds don’t intend to settle or (were) unwilling to settle, the SEC would initiate a formal legal proceeding against them,” Berliner said.
Though Intervest and Carson did not admit or deny the commission’s findings, both the firm and its rep agreed to a cease-and-desist, as well as censures and disgorgement with prejudgment interest totaling $130,489 for the firm and $304,396 for Carson, which would be distributed among harmed investors. Both the firm and Carson also agreed to civil penalties, according to the SEC.