The Securities and Exchange Commission (SEC) has ordered Voya Financial Advisors to pay nearly $23 million to settle charges that it breached its fiduciary duties by overcharging its advisory clients. The violations were related to its mutual fund share class selection practices, sweep account revenue sharing, and its alternative investment selection practices.
According to the SEC, Voya recommended that clients purchase or hold mutual fund share classes that charged 12b-1 fees when lower-cost share classes of the same funds were available. The recurring fees typically range from 0.25 to 1.00 percent and are used to cover costs related to fund distribution and shareholder services.
Voya was also charged with failing to disclose a revenue sharing arrangement it had with its unaffiliated clearing broker which paid Voya a portion of the revenue received from cash sweep products in which Voya invested advisory client assets. Voya did not disclose this practice or the related conflicts of interest, the regulators said.
A sweep account is used by brokerages to hold uninvested cash until the investor or their adviser decides how to invest the money. The clearing broker provided Voya with a list of more than 130 money market funds as sweep account options for advisory clients.
The SEC stated that the funds that paid Voya the most revenue sharing generally charged higher fees and returned lower investment yields to clients. Conversely, the money market funds that paid no or lower revenue sharing to Voya generally charged lower fees and returned higher investment yields to clients.
The SEC claims that Voya’s account opening worksheet listed only two sweep account options, one for retirement accounts and one for non-retirement accounts, which paid Voya the highest revenue sharing. If clients wanted to choose a different option, they had to manually write the fund name from a list located later in the document.
As a result, from 2013 through August 2017, Voya recommended and invested more than 97 percent of advisory clients’ uninvested cash in two money market funds with the highest available rate of revenue sharing.
For example, in August 2017, those two money market funds paid Voya clients a 7-day effective yield of approximately 0.38 percent, while several other money market funds in the list would have paid a 7-day yield as high as 0.92 percent, the SEC alleged.
Lastly, the SEC claims that Voya caused certain advisory clients to invest in higher-cost illiquid alternative investment products through brokerage accounts that charged upfront commissions, when those same investments were available commission-free through fee-based advisory accounts.
The SEC indicated that the violations occurred between January 2013 through December 2018, and Voya failed to implement policies and procedures designed to prevent the violations.
In addition to a censure, Voya was ordered to pay approximately $11.6 million in disgorgement, $2.4 million in prejudgment interest, and a $9 million civil penalty.
Voya Financial Advisors, formerly known as ING Financial Partners, is an investment adviser and broker-dealer with $15.9 billion in assets under management.