Investment advisory firm Ambassador Advisors LLC and three of its executives lost the fight to the Securities and Exchange Commission for failing to disclose information to clients.
The decision came after a recent eight-day jury trial in Alentown.
The final order, which typically includes possible fines and compensation for customers, was postponed until a conference on Thursday, according to a court record. The case includes between $ 270.6 million and $ 489.6 million in managed assets from 2,600 to 4,300 customer accounts, mostly owned by individuals, according to court documents.
The SEC reported that the ambassador, who is in 1755 Oregon Pike, and its executives Bernard I. Bostwick, Robert E. Kaufman and Adrian E. Young directed clients’ investments in mutual funds with the higher fees they received. The SEC said the ambassador did not provide clients with sufficient information about conflicts of interest. The investigation focused on business between 2014 and 2018.
In a statement after the jury trial, the ambassador said the confusing nature of the issue forced the jury to side with the SEC. Said the ambassador he struggled with the regulator for two years rather than settle because he argued that the SEC’s law enforcement efforts create new rules without following a formal rulemaking process. The firm claimed there were simply no right words in its brochures.
“Unfortunately, due to the broad nature Chapter 206 (2)It doesn’t matter if the adviser manages Ponzi’s scheme or omits the desired verbosity, any violation is considered a breach of trust to clients, “the ambassador wrote in a statement after the trial.
SEC Director of Law Enforcement Gurbir S. Greval said the agency was pleased with the jury’s verdict on bringing the ambassador and his executives to justice for fraud in investment advice.
“Investment advisers have a fiduciary duty to act in the interests of their clients, to seek the best execution of client transactions and to fully and fairly disclose all material facts relevant to the conflict of interest,” Greval said. “And if they don’t do it, as the jury admitted today, they put their clients at risk. Therefore, we will continue to look for investment advisers who violate their trust obligations. “
The ambassador said his business model, managed by mutual funds, is over. He started using the exchange-traded funds / shares model in 2016, his statement said.
“The silver backing in this verdict is that it seems that much of any financial fine imposed on the ambassador will be deposited in the accounts of clients who have held mutual funds during this period,” the firm writes.
President Advisors President Bernie Bostwick said in a statement after the verdict: “We are grateful for the continued prayerful support and perseverance of our clients, staff and families during this difficult time. Above all, we believed throughout the path that regardless of the outcome, God will be glorified in the end, regardless of whether the final decision was in our favor or not. We remain safe in this knowledge: God is glorified in this decision, and He rules over all the details of our lives, including our finances and business practices. ”
Fees in question
Until 2018, the ambassador’s business model involved investing for clients in mutual funds that charged a certain fee. The fee, named 12b-1 under the SEC rule, which allows them, is paid from the fund’s assets to sellers who sell and sell mutual funds, and sometimes to cover the cost of shareholder services.
The SEC said the ambassador’s clients received less return on their investment because the fees were paid to the ambassador.
The SEC said some of the mutual funds invested by the ambassador are available with or without lower fees. The SEC said the ambassador had not made it clear to clients that mutual funds with lower fees and funds without commissions were available. The law also requires consultants to act in the best financial interests of their clients rather than in their own interests. This is called trusted interest. The SEC stated that by not informing clients about low-level or unpaid alternatives within the same funds, the firm is not working in the best interests of the clients, in essence, this is a conflict of interest.
The ambassador claimed that her use of paid funds was offset by a reduction in the fee for the consultation she charged from her clients, so the clients were not affected. He adds that he made all necessary disclosures, including what could be a conflict of interest, “in strict accordance with SEC instructions.” This additional disclosure of the availability of lower classes of shares is not required, the firm argued in court documents.
Part of the trend
The ambassador said in a statement that “the SEC statement makes the situation more inflammatory than it is.”
“The complaint was part of an SEC initiative to disclose share class information, in which many consulting firms across the country followed the path of least resistance,” the firm said. “We were one of the few firms to challenge this SEC initiative to create new regulation without following a formal rulemaking process.”
The Financial Services Institute Inc., a trade association for independent financial companies, filed a lawsuit against one in support of the ambassador. He argued that a decision in favor of the SEC could have a far-reaching impact on financial advisers. The Financial Services Institute and the American Securities Association, as well as the Institute for Competitive Entrepreneurship and the New Civil Liberties Alliance, filed a legal complaint against the SEC’s position, saying the commission used “backdoor regulation” to try to eliminate fees.
Thinkadvisor.com reported that the SEC continued to prosecute consultants for violations of Tariffs 12b-1 after it discontinued its Share Class Disclosure Initiative in April 2020.
This voluntary initiative began in February 2018 and gave advisors the opportunity to report that they have not been able to fully and fairly disclose their conflicts of interest by choosing more expensive mutual fund classes for their advising clients who paid a 12b-1 fee at lower – classes before the costs were available to customers and were entitled to standard terms of payment, which did not include the imposition of a civil fine.
According to the SEC, from March 11, 2019 to September 30, 2019. The commission issued orders against 95 advisers who decided to participate in the initiative.
The ambassador describes himself as a biblical provider of wealth management and financial strategies. Founded in 1990, it serves more than 3,000 customers (including 2,800 families as well as businesses and organizations), managing nearly $ 550 million, according to LNP | Archive of LancasterOnline reports. The office has just over 30 employees.
Bostwick of Lancaster is the ambassador’s president. Kaufman of Tampa, Florida, but formerly of Mount Joy, is the founder and former president of the ambassador. Young of Litiz is the Executive Vice President and Chief Control Officer.