The Atlanta Journal-Constitution
SunTrust unit may face SEC fraud charge
Atlanta bank discloses investigation involving mutual fund options.
Investment division allegedly steered customers into costlier mutual funds.
Federal regulators are considering fraud charges against SunTrust Banks over allegations that its investment business steered customers into costly mutual funds when cheaper options were available.
The Atlanta bank said in a filing that the Securities and Exchange Commission’s enforcement division “made a preliminary determination to recommend ... an enforcement action” against SunTrust Investment Services, the bank’s broker-dealer and insurance arm.
The probe was disclosed last week in SunTrust’s annual report filed with the SEC.
If found guilty, the bank could face not only fines but the potential loss of some of its investment business income and its fast-track status for issuing new bonds and other securities.
In late 2015, J.P. Morgan paid $267 million to settle SEC charges that it failed to disclose conflicts of interest when it steered customers into its own investment products that were more costly than alternative funds.
Last year, the SEC launched a campaign to investigate whether banks and investment firms were making self-serving investment recommendations to customers.
At the center of the SunTrust investigation is whether the bank’s investment arm bought costly mutual funds on behalf of clients that charged a type of marketing fee, called 12b-1 fees, rather than recommending cheaper mutual funds that don’t charge such fees.
Often, funds that charge the higher fees also pay higher commissions to companies and brokers that sell them.
Such actions could violate the 77-year-old Investment Advisers Act, which requires money managers registered with the SEC to act in clients’ best interests.
The U.S. Department of Labor rolled out a similar rule, set to take effect next month, for brokers, insurance agents and other investment advisers when selling or recommending investments in retirement accounts such as a 401(k).
However, President Trump is seeking to delay or repeal that new rule. Last month, he issued an executive order directing the Labor Department to delay implementation of the so-call fiduciary rule, set to take effect April 10. This week, the Labor Department proposed delaying it for 60 days.
Meanwhile, SunTrust said in its filing that its investment business, STIS, is “researching the extent to which alternate mutual fund classes existed which did not impose such fees.” The bank said fees it has collected add up to “$5 million or less,” the bank said.
However, penalties could be more costly both in dollars and tougher restrictions on SunTrust’s ability to earn fees on investment product sales, and its ability to issue new bonds or other securities to investors.