First Republic's RIA agreed to a censure and will pay more than $1.8 million to the Securities and Exchange Commission (SEC). The SEC alleges that First Republic failed to disclose a conflict in placing customers in certain mutual fund share classes and cash sweep accounts.
Specifically, the SEC alleges that First Republic breached its fiduciary duty by failing to provide clients with information regarding a revenue-sharing agreement. According to the order, First Republic self-reported the violations under the SEC's Share Class Selection Disclosure Initiative targeting advisory firms that recommended high-fee mutual funds.
In fact, while the alleged violation related to a no-transaction-fee mutual fund program offered by the clearing firm, the funds charged higher expense ratios and higher fees than other share classes offered by the clearing firm. As a result, "The payments the affiliated broker received under the agreement created an incentive for First Republic to recommend mutual funds covered by the agreement over other investments, including lower-cost share classes of the same mutual fund when rendering investment advice to its clients."
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