Washington, D.C., May 1, 2008 (Lawfuel) – The Securities and Exchange Commission today filed a settled enforcement action against Banc of America Investment Services, Inc. (BAISI) for failing to disclose to clients that in selecting investments for discretionary mutual fund wrap fee accounts, it favored two mutual funds affiliated with BAISI.
The SEC also charged Columbia Management Advisors, LLC (Columbia), as successor to Banc of America Capital Management, LLC (BACAP), with aiding and abetting, and causing certain of BAISI’s violations. As part of the settlement, BAISI and Columbia agreed to pay a total of nearly $10 million in disgorgement and penalties. The Commission ordered BAISI to distribute the settlement amount to affected clients.
“BAISI’s selection of mutual funds for wrap fee clients was compromised when it favored its own proprietary funds over non-affiliated funds,” said Linda Chatman Thomsen, Director of the SEC’s Division of Enforcement. “By using a method to select funds that was at odds with information it provided to clients, BAISI violated its duty of loyalty to its clients.”
Fredric Firestone, Associate Director of the SEC’s Division of Enforcement, added, “This Order serves to remind the investment adviser community that the Commission will not tolerate advisers placing their own pecuniary interests ahead of their clients’.”
The Commission’s Order finds that, from July 2002 through December 2004, BAISI made material misrepresentations and omissions to clients who had given BAISI discretion to select mutual funds for them. The clients participated in an asset-based or “wrap” fee program in which they paid BAISI a fee based upon the amount of their assets in exchange for BAISI providing advisory and other account services. BAISI had a fiduciary duty to act in the best interests of its clients, which required BAISI to disclose material information concerning conflicts of interest, and precluded it from undisclosed use of its clients’ assets to benefit itself or its affiliates.
In the Order, the Commission finds that BAISI purchased at least two proprietary “Nations Funds” for clients with discretionary wrap fee accounts using a methodology that was contrary to BAISI’s disclosures to those clients. The Order also finds that BAISI omitted to disclose the scope of its and BACAP’s conflict of interests, and their bias in the recommendation and selection process. BACAP earned additional fees as a result of these violations because it was paid management and other fees based on the total assets of Nations Funds.
The Commission’s Order finds that BAISI violated provisions of the Securities Act and the Advisers Act, and that Columbia aided and abetted, and caused certain of BAISI’s violations of the Advisers Act. Under the terms of the settlement, BAISI and Columbia agreed to censures, cease-and-desist orders, and a total of $9,763,634 in disgorgement, prejudgment interest, and penalties, which will be put into a Fair Fund to benefit affected clients of BAISI. The Order also requires BAISI to conduct a review of the firm’s method for recommending and selecting mutual funds in discretionary programs, and the adequacy of its disclosures in this area.