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Regulatory Sanctions

Credit Suisse and Star Broker to Pay $7.9Mn Over Breached Fiduciary Duty - SEC

April 5, 2017

[Photo: Credit Suisse Zurich Office /]


[In this day and age of ‘no load’ mutual funds, it may come as a surprise that there are still cases where brokers and investment advisers effectively overcharge their clients on mutual fund purchases. This would include instances where: (i) clients are sold shares that charge 12b-1 marketing fees when less expensive classes of shares are available; and, (ii) break-point discounts on (front load) commissions are available but not taken.] 


Credit Suisse Securities and managing director Sanford Katz agreed to pay over $7.9 million to settle SEC charges that Credit Suisse clients overpaid for mutual fund purchases when less expensive share classes were available. The Administrative Proceedings, in which these cases were reported, arise out of alleged breaches of fiduciary duty, inadequate disclosures, and deficiencies in compliance policies and procedures by Credit Suisse.


Credit Suisse will pay $5.8 million in disgorgement, prejudgment interest and civil penalties.
Katz will pay $2.2 million in disgorgement, prejudgment interest and civil penalties.


SANFORD KATZ, 54, a resident of San Rafael, CA, , Katz was a Managing Director and Relationship Manager in Credit Suisse’s San Francisco branch office. Hired by Credit Suisse in October 2008, Katz held Series 3, 7, and 63 securities licenses and was a registered rep and an investment adviser rep of Credit Suisse.


CREDIT SUISSE SECURITIES (USA), with headquarters in New York, NY, is dually registered with the SEC as a broker-dealer and an investment adviser. Credit Suisse is a wholly-owned subsidiary of Credit Suisse (USA), which is an indirect wholly-owned subsidiary of Credit Suisse Group.  


ACCORDING TO SEC ADMINISTRATIVE PROCEEDINGS, … over a 5-year period - between 1/1/09 and 1/21/14 – Sanford Katz purchased or held Class A mutual fund shares for advisory clients who were eligible to purchase or hold less expensive institutional share classes of the same mutual funds.


Class A shares – but not institutional shares - are charged annual marketing and distribution (12b-1) fees of about 25 basis points. The 12b-1 fees were passed through to Credit Suisse which, in turn, paid a portion of that amount to its investment adviser representatives, also referred to as Relationship Managers (“RMs”).


Katz’s practice of putting advisory clients in Class A shares when those clients were eligible for less expensive institutional share classes resulted in Credit Suisse collecting approximately $2.5 million in 12b-1 fees, approximately $1.1 million of which was paid to Katz. This practice was inconsistent with Katz’s fiduciary duty, his representations to clients, and his obligation to obtain best execution for his advisory clients.


Section 206 of the Advisers Act imposes on investment advisers a fiduciary duty to act for the benefit of their clients. That duty includes, among other things, an obligation to seek best execution for client transactions – i.e., “to seek the most favorable terms reasonably available under the circumstances.”


For its part, Credit Suisse’s disclosures were deficient in that they didn’t adequately inform its advisory clients of the conflict of interest presented by its RMs’ share class selection practices. Credit Suisse disclosed in its Forms ADV and client agreements that it “may” receive 12b-1 fees as the result of investments in certain mutual funds and that such fees created a conflict of interest due to a financial incentive for RMs to select or recommend investments that maximized this compensation. However, Credit Suisse did not disclose that many mutual funds offered less expensive share classes, including some that did not pay 12b-1 fees and were accordingly less expensive for eligible investors.


[Click here to access Katz’s Administrative Proceedings.] 

[Click here to access Credit Suisse’s Administrative Proceedings.]