The Securities and Exchange Commission has settled charges against three AIG affiliates for steering mutual fund clients toward more expensive share classes so the firms could collect more fees.

The three firms – Royal Alliance Associates, SagePoint Financial, and FSC Securities Corporation – consented to the SEC’s order without admitting or denying the charges that they broke ss206(2), 206(4) and 207 Investment Advisers Act 1940 and SEC Rule 206(4)-7. They agreed to a 'disgorgement' (paying back the proceeds of the misconduct) of more than $2 million in improper fees plus prejudgment interest and a $7½ million penalty on top.

An SEC investigation found that the firms placed clients in share classes that charged fees for marketing and distribution despite those clients being eligible to buy shares in fund classes without those additional charges. As a result, the firms collected approximately $2 million in extra fees. The firms failed to disclose their conflict of interest in selecting share classes that would generate more revenue for them.

The SEC commented that investment advisers ought to be "vigilant about conflicts of interest" when selecting mutual fund share classes because the choice may benefit them improperly at the expense of their clients, which sounds a little like gently chiding Al Capone for not being vigilant enough about the rapaciousness of his men. The SEC Enforcement Division’s asset management unit has had its eye on conflicts of interest in the "mutual fund share class selection" area for some time.

According to the SEC’s order, which institutes a settled administrative proceeding, the AIG affiliates also failed to monitor advisory accounts every quarter to prevent "reverse churning." The firms abrogated their own compliance policies and procedures that they had set up to ensure that fee-based or 'wrap' advisory accounts that charged inclusive fees for both advisory services and trading costs remained in the best interest of clients who traded infrequently.