Using your selected article about an alleged legal/ethical compliance breach, an
ID: 347516 • Letter: U
Question
Using your selected article about an alleged legal/ethical compliance breach, answer the following questions:
What is your opinion about the activities your article describes. What do you think about what happened, the company’s behavior, the government’s interventions, the impact on the industry and consumers and the public in general?
Article for Compliance Report:
https://www.sec.gov/news/press-release/2018-26
Text from article:
SEC Charges Ameriprise With Overcharging Retirement Account Customers for Mutual Fund Shares
The Securities and Exchange Commission today announced that a Minnesota-based broker-dealer and investment adviser has agreed to settle charges for recommending and selling higher-fee mutual fund shares to retail retirement account customers and for failing to provide sales charge waivers.
According to the SEC’s order, Ameriprise Financial Services Inc. disadvantaged certain retirement account customers by failing to ascertain their eligibility for less expensive mutual fund share classes. Ameriprise recommended and sold these customers more expensive mutual fund share classes when less expensive share classes were available. Ameriprise also failed to disclose that it would receive greater compensation from the purchases and that the purchases would negatively impact the overall return on the customers’ investments.
“Ameriprise generated greater revenue for itself but lower returns for its retirement account customers by recommending higher-fee share classes,” said Anthony S. Kelly, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. “As evidenced by our recently announced Share Class Selection Disclosure Initiative, pursuing these types of actions remains a priority for the Division as we seek to get money back in the hands of harmed investors.”
Approximately 1,791 customer accounts paid a total of $1,778,592.31 in unnecessary up-front sales charges, contingent deferred sales charges, and higher ongoing fees and expenses as a result of Ameriprise’s practices. Ameriprise cooperated with the Commission and voluntarily identified the affected accounts, issued payments including interest to the affected customers, and converted eligible customers to the mutual fund share class with the lowest expenses for which they are eligible, at no cost.
The SEC’s order instituting a settled administrative and cease-and-desist proceeding finds that Ameriprise violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933. Without admitting or denying the findings, Ameriprise consented to a cease-and-desist order, a censure, and a penalty of $230,000.
The SEC’s investigation was conducted by Salvatore Massa, Steven J. Meiner, and John Farinacci of the Asset Management Unit, and supervised by Jessica M. Weissman.
Explanation / Answer
A M E R I P R I S E
Ameriprise financial services Inc. an investment advisor recommended and sold expensive mutual fund shares to retirement account customers. The company withheld information about less expensive mutual fund share classes and about the greater compensation it would receive from such selling. Such selling increased the company’s revenue but negatively impacted the overall return for the customers. 1,791 customer incurred additional cost in total of $1,778,592.31 in unnecessary charges, and higher fees and expenses. SEC find them stating that they violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933. The company neither admitted nor denied the findings but consented to a settlement of $230,000.
The company violated two clauses
The company went against the principle of beneficence- acting in order to do good. The company did not act to prevent misleading of customers. It also showed no integrity and professional behavior. It also went against the principle of autonomy – helping an individual in making an informed decision. By being biased towards high-class shares for getting more fees, the company also did not stick to the principle of objectivity
The company went in favor of higher revenue at the expense of consumer welfare and engaged in both legally and ethically harmful behavior. The government interfered with SEC and censured along with a fine. SEC also went on to agree to stop financial penalties for whistleblowers who self-report violations involving mutual funds if they also return investors’ money. The consumers were negatively affected by the company’s behavior leading to additional expenses with a lesser return. This also led to decrease in trust on the company and other mutual fund advisors in general.
I find it disturbing to see reputed companies fall into the trap of unethical financial transactions and later paying fines as settlements. This has been continuing for long as an acceptable behavior in the investment circle. It is also disturbing to find that such maleficent advisors do not leave even retired persons. It seems that fines and censures are not enough to stop such activities. Greater punishments are necessary to stop this. Since such practices are also fast becoming a socially accepted behavior, it is essential to rethink our system and structure. It also reminds me of a quote,
'If you wanna stop terrorism, stop doing it'.
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