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From Securities Regulation Daily, April 5, 2017

SEC settles breach of fiduciary duty claims against Credit Suisse, broker

By Joseph Arshawsky, J.D.

Credit Suisse Securities (USA) LLC (Credit Suisse) and Sanford Michael Katz (Katz), its former investment adviser representative, agreed to settle for approximately $8 million in combined disgorgement and civil penalties, allegations that they breached their fiduciary duties by purchasing mutual fund shares for which fees applied when no-fee options were available (In the Matter of Credit Suisse Securities (USA) LLCRelease No. 34-80373, April 4, 2017; In the Matter of KatzRelease No. IA-4679 April 4, 2017).

These proceedings arose out of breaches of fiduciary duty, inadequate disclosures, and deficiencies in compliance policies and procedures by Credit Suisse, over a relevant period of January 1, 2009 through January 21, 2014. During the relevant period, Katz was a managing director and relationship manager in Credit Suisse’s San Francisco branch office.

12b-1 fees. Credit Suisse investment adviser representatives, including Katz, purchased or held Class A mutual fund shares for advisory clients who were eligible to purchase or hold less expensive institutional share classes of the same mutual funds. The major difference is the existence of marketing and distribution fees imposed on Class A shareholders pursuant to Investment Company Act Section 12(b) and Rule 12b-1 thereunder ("12b-1 fees"). The 12b-1 fees are paid out of the assets of the fund as a portion of its expense ratio, typically 25 basis points per year for Class A shares. In this case, the 12b-1 fees were passed through to Credit Suisse, which in turn paid a portion of that amount to its investment adviser representatives. Thus, 12b-1 fees decreased the value of the advisory clients’ investments in mutual funds and increased the compensation paid to Credit Suisse, Katz, and other representatives. An investor who holds institutional share classes of a mutual fund will pay lower fees over time—and earn higher investment returns—than an investor who holds Class A shares of the same fund. Because of the sales of Class A shares, Credit Suisse received approximately $3.2 million in 12b-1 fees that it would not have collected had its clients been invested in lower-cost share classes for which they were eligible.

Inadequate disclosures. Credit Suisse did not disclose that many mutual funds offered a variety of share classes, including some institutional shares that did not pay 12b-1 fees and were accordingly less expensive for eligible investors. Credit Suisse did not also disclose or identify its conflict of interest presented by its purchase of mutual fund share classes that charged 12b-1 fees when its clients were eligible to purchase share classes of the same funds that did not charge 12b-1 fees.

Best execution. Both Credit Suisse and Katz breached their duty to seek best execution on behalf of clients. By purchasing Class A shares when his clients were eligible for institutional share classes and by failing to disclose to his clients that best execution might not be sought for mutual funds with multiple available share classes, Katz breached his duty to seek best execution on behalf of his clients.

Compliance deficiencies. As institutional share classes became available to non-institutional purchasers, Credit Suisse failed to update its policies and procedures to require personnel specifically to identify or evaluate available institutional share classes. Moreover, Credit Suisse failed to update or enhance its policies or procedures to address instances in which its investment representatives were purchasing and holding Class A shares when less costly institutional share classes were available.

Violations. Pursuant to Exchange Act Section 15(b) and Advisers Act Sections 203(e) and 203(k), Credit Suisse agreed to cease and desist from committing or causing any violation of Advisers Act Sections 206(2), 206(4), and 207 and Rule 206(4)-7. Pursuant to Exchange Act Section 15(b) and Advisers Act Sections 203(f) and 203(k), Katz agreed to cease and desist from committing or causing any violation of Advisers Act Section 206(2).

Penalties. Both Credit Suisse and Katz were censured. Credit Suisse was ordered to pay disgorgement of approximately $2.1 million, pre-judgment interest of just over $380,000, and a civil money penalty of just over $3.2 million. Katz was ordered to pay disgorgement of approximately $1.1 million, pre-judgment interest of just under $200,000, and a civil money penalty of $850,000.

The releases are No. 34-80373; (Credit Suisse) and No. IA-4679 (Katz).

Companies: Credit Suisse Securities (USA) LLC

MainStory: TopStory Enforcement FiduciaryDuties InvestmentAdvisers

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