Compliance

SEC Accuses 403(b) Plan Advisory Firm of Conflicts-of-Interest

Envoy Advisory submitted an offer of settlement which the SEC accepted.

By Rebecca Moore editors@strategic-i.com | September 13, 2017

The Securities and Exchange Commission (SEC) has instituted a cease-and-desist order against Envoy Advisory Inc.

Envoy is accused of breaches of fiduciary duty, inadequate disclosures and compliance deficiencies. Most of its clients are small to medium-sized non-profit, faith-based organizations that sponsor Employee Retirement Income Security Act (ERISA) Section 403(b) retirement plans for employees. In its order, the SEC notes that Envoy offers both plan sponsor and individual retirement account (IRA) clients a menu of mutual funds and exchange-traded funds (ETFs) screened and selected by the advisory firm.

According to the SEC’s order, from January 2013 through March 2017, Envoy recommended, and plan participants and IRA holders held, Class A mutual fund shares when less expensive institutional share classes of the same mutual funds were available. In contrast to institutional shares, Class A shares may charge investors marketing and distribution fees, typically 25 basis points per year, pursuant to Section 12(b) of the Investment Company Act of 1940 and Rule 12b-1 thereunder. The 12b-1 fees paid by mutual funds held by plan participants and IRA holders went to Envoy’s affiliated broker-dealer, Envoy Securities, LLC. The SEC says that during the relevant period, Envoy Securities received at least $24,893.26 in 12b-1 fees in connection with investments in higher-fee share classes.

In addition, the SEC says Envoy’s disclosures did not adequately inform its clients of the conflict-of-interest presented by its recommendations to purchase Class A mutual fund shares. The SEC also accuses the advisory firm of failing to adopt and implement written compliance policies and procedures governing mutual fund share class selection and failed to implement its compliance policy and procedure regarding conflicts-of-interest.

Envoy submitted an offer of settlement which the SEC accepted.

Beginning in October 2016, Envoy stopped recommending investments in share classes that pay 12b-1 fees and began transferring legacy and existing clients’ holdings to institutional share classes. Envoy has also made arrangements to credit or rebate plan sponsors and IRA holders with any 12b-1 fees it may continue to receive from legacy holdings.

Envoy has confirmed that $2,646.82 in rebates have been sent to 50 IRA holders through credits to client accounts and $22, 246.44 in rebates have been sent to 40 plan sponsors through checks.