Fraud charges against the SunTrust Banks are being considered by U.S. Securities and Exchange Commission over allegations that its investment business steered the customers into costly mutual funds when cheaper options were available.
In a filing the Atlanta bank said that SEC’s enforcement division “made a preliminary determination to recommend that the SEC bring an enforcement action” against the SunTrust Investment Services, the bank’s broker-dealer and insurance arm.
The federal probe was disclosed last week in the SunTrust’s annual report filed with SEC.
If found guilty, the bank potentially faces not only fines but also the potential loss of some of its investment business income and its fast-track status for issuing the new bonds and other securities.
In the late 2015, J.P. Morgan paid $267 million to settle the SEC charges when it failed to disclose conflicts of interest as it steered customers into its own investment products which were more costly than alternative funds.
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In the last year, the SEC launched a campaign to investigate whether the banks and investment firms were making self-serving investment recommendations to the customers.
The center of SunTrust investigation is whether the bank’s investment arm bought costly mutual funds on the behalf of the clients that charged a type of marketing fee, called 12b-1 fees, rather than recommending the cheaper mutual funds which do not charge such fees.
Often, mutual funds which charge the higher fees pay higher commissions to the companies and brokers that sell them.
Such actions could violate the 77-year-old federal Investment Advisers Act. The law also requires money managers registered with the SEC, as the SunTrust’s investment unit is, to act in their clients’ best interests.
The U.S. Department of Labor also rolled out a similar rule, set to take effect from the next month, which requires brokers, insurance agents and also other investment advisers to act in the clients’ best interests when selling or recommending investments in retirement accounts, such as 401(k) accounts.
However, the President Trump is seeking to de-rail that new rule by delaying it or repealing it. In the last month, he issued an executive order directing the Labor Department to delay implementation of the so-call fiduciary rule, which is set to take effect from April 10. In this week, the Labor Department proposed delaying it for 60 days.
Mrudula Duddempudi.
