Last week, Atlanta-based SunTrust revealed that the Securities and Exchange Commission is considering bringing fraud charges against it. The disclosure, which SunTrust made in its annual SEC filing, explains that the SEC’s enforcement division “made a preliminary determination to recommend that the SEC bring an enforcement action” against SunTrust Investment Services, the bank’s broker-dealer and insurance arm.
The potential fraud charges stem from allegations that SunTrust’s investment business steered customers into costly mutual funds when cheaper options were available. Specifically, the SEC is investigating whether the bank’s investment arm directed clients into mutual funds that charge a type of marketing fee, called a 12b-1 fee, rather than recommending funds that don’t charge these fees. Although clients lose out under such arrangements, the banks benefit—frequently, mutual funds that charge higher fees also pay higher commissions to the companies and brokers that sell them.
The SunTrust probe appears to be part of a larger SEC effort, launched last year, to investigate whether banks and investment firms were making self-serving investment recommendations to customers. If the allegations shore up, SunTrust’s actions could violate the Investment Advisers Act, which requires certain SEC-registered money managers to act in their clients’ best interests.
A successful enforcement action might carry significant consequences for SunTrust. Although the bank’s SEC filing estimates that the fees it has collected in connection with certain mutual funds add up to “$5 million or less,” penalties could increase the price tag of SunTrust’s misconduct. More importantly, SunTrust could lose its “well-known seasoned issuer” status, an elite classification that allows trustworthy companies to issue bonds and stocks with simplified, automatic approval by the SEC.
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