Lincoln, Neb.–based Ameritas Advisory Services, the registered investment advisor that was spun out of Ameritas Investment Company in October 2021, will pay investors $4.6 million after settling charges with the Securities and Exchange Commission that it recommended certain mutual funds and share classes for clients when more affordable options were available.
According to the commission’s order, Ameritas “breached its fiduciary duty to advisory clients” when it failed to disclose to clients instances of third-party compensation. This occurred when the RIA was part of the dually registered Ameritas Investment Company, formed in 1998.
In 2014, the firm had an arrangement with its clearing broker that the latter would often share revenue from investments, in particular mutual fund share classes with Ameritas, according to the SEC. Mutual funds often offer different types of share classes with similar investment objectives but differing fee structures, meaning clients are usually (though not always) better off investing in the share classes without a fee.
While Ameritas would benefit from the revenue shared from these recommendations, clients were suffering by indirectly paying the fees included in the expense ratio of these share classes, according to the SEC. Therefore, because of this arrangement Ameritas had an incentive to recommend those mutual funds and share classes that would result in the firm pocketing the extra revenue from the clearing broker.
The clearing broker also created a “no-transaction” fee program that included certain mutual fund shares, though the broker tended to charge those funds a higher recurring fee compared with those not included in the program, according to the commission; this resulted in higher expense ratios for the included funds. But starting around February 2014, the two agreed that the broker would share some of the recurring fees from investments made to shares in the program, according to the commission.
“The percentage that the Clearing Broker shared increased with the level of the assets held by AIC’s brokerage customers, including assets held by advisory clients, who invested in those (no-transaction fee) mutual funds,” the order read. “Lower-cost share classes of those same funds were also generally available for which the Clearing Broker would have paid no or lower revenue sharing.”
That December, Ameritas decided it would stop receiving revenue sharing in this fashion and updated its Form ADV, but it didn’t take “reasonable steps” to ensure the broker stopped paying, the SEC said. Ameritas eventually stopped receiving such payments in March 2021, after discovering the broker had continued to pay them.
Additionally, Ameritas would often recommend certain sweep accounts to hold uninvested cash, and the clearing broker offered the dual registrant a revenue-sharing arrangement on certain share classes of this type but not for others, according to the commission.
In all, the commission claimed Ameritas failed to seek best execution for their clients by investing in certain share classes of mutual funds and money market funds when share classes of the same funds (with lower fees) were available, and knocked the firm for not adopting written compliance procedures to prevent such violations. Ameritas had worked with the SEC to come to a "mutually agreeable" settlement, according to spokesperson Derek Rayment.
"AAS remains committed to regulatory compliance and will continue to uphold the integrity of its services,” he said.
In the order, Ameritas verified it had “reviewed and corrected as necessary” all disclosure documents concerning the issues the commission found, and had made efforts to address the broader issues. In addition to discontinuing revenue-sharing payments from the no-transaction-fee programs, as early as March 2018 Ameritas began rebating revenue-sharing amounts from investments in certain funds to clients.
The firm didn’t admit nor deny the substance of the order, but agreed to a cease-and-desist order and censure, as well as disgorgement totaling more than $3.4 million, prejudgment interest of $543,390 and a civil penalty totaling $750,000.
