SEC Charges Investment Adviser and Principals for Breaching Fiduciary Duties

This post is written on behalf of Girard Bengali, APC.

SEC Charges Investment Adviser and Principals for Breaching Fiduciary Duties

Litigation Release No. 24817 / May 13, 2020

Securities and Exchange Commission v. Ambassador Advisors, LLC, Bernard I. Bostwick, Robert E. Kauffman, and Adrian E. Young, No. 5:20-cv-02274 (E.D. Pa. filed May 13, 2020)

Source: https://www.sec.gov/litigation/litreleases/2020/lr24817.htm

The Securities and Exchange Commission today charged registered investment adviser Ambassador Advisors, LLC, and its principals, Bernard I. Bostwick, Robert E. Kauffman, and Adrian E. Young, with breaches of fiduciary duty arising out of their mutual fund share class selection practices.

The SEC’s complaint alleges that, from August 2014 to December 2018, Ambassador, Bostwick, Kauffman, and Young, failed to adequately disclose conflicts of interest arising from their selection of mutual fund share classes that charged 12b-1 fees, which Bostwick, Kauffman, and Young received, instead of lower-cost share classes of the same funds that were available to clients and that would not have paid 12b-1 fee compensation to Bostwick, Kauffman, and Young. In addition, the complaint alleges that Ambassador, Bostwick, Kauffman, and Young breached their duty to seek best execution for their clients by causing certain advisory clients to invest in fund share classes that charged 12b-1 fees when share classes of the same funds that presented a more favorable value for these clients under the particular circumstances in place at the time of the transactions were available to the clients. According to the complaint, Ambassador also failed to adopt and implement written policies and procedures designed to prevent these violations. Ambassador was eligible to self-report to the SEC pursuant to the Division of Enforcement’s Share Class Selection Disclosure Initiative, but did not do so.

The complaint alleges that Ambassador, Bostwick, Kauffman, and Young violated the antifraud provisions of Section 206(2) of the Investment Advisers Act of 1940, and that Ambassador violated the antifraud provisions of Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder. The SEC seeks permanent injunctions, disgorgement of ill-gotten gains, prejudgment interest, and civil penalties.

The SEC’s investigation was conducted by Oreste P. McClung and supervised by Brendan P. McGlynn, both of the Asset Management Unit in the Philadelphia Regional Office. John Farinacci, an industry expert in the Asset Management Unit, assisted with the investigation. The litigation will be led by Christopher R. Kelly and Jennifer Chun Barry.

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