Federal regulators on Thursday wrung nearly $10 million in restitution and penalties from Bank of America Corp. for assigning its own mutual funds to investors instead of giving them other choices.
From 2002 to 2004, the Charlotte bank's brokerage arm, Banc of America Investment Services Inc., failed to disclose to clients that in selecting investments for certain fee-based accounts it favored two of its own mutual funds, instead of funds offered by other companies, the Securities and Exchange Commission found.
In a settlement reached with the bank, the SEC ordered restitution distributed to affected customers -- about 15,000 accounts. Bank of America spokeswoman Robyn Tice said the company cooperated with the investigation and will notify clients.
The settlement was the latest to target mutual fund firms for putting their own interest ahead of their obligations to customers.
The clients in BAISI's asset-based or wrap-fee program paid a fee based on the amount of their assets in return for advice and other services. The SEC said BAISI had a fiduciary duty to act in the best interest of clients and to disclose any conflicts of interest. The agency, however, found that the firm invested in two of its own Nations Funds on behalf of clients -- a move at odds with disclosures provided to customers.
Bank of America earned extra revenue as a result of the violations because it also makes fees based on the total assets of its Nations Funds, the SEC said. Bank of America acquired FleetBoston Financial Corp. in April 2004 and took Fleet's Columbia name for the combined mutual fund family. The SEC also charged Columbia as the successor organization.
"BAISI's selection of mutual funds for wrap fee clients was compromised when it favored its own proprietary funds over non-affiliated funds," Linda Chatman Thomsen, the SEC's enforcement director, said in a statement. "By using a method to select funds that was at odds with information it provided to clients, BAISI violated its duty of loyalty to its clients."
Tice, the Bank of America spokeswoman, said the company now has procedures in place designed to prevent the practice from happening again.
The $9.8 million settlement is small compared to the bank's biggest regulatory run-in involving mutual funds. In 2004, Bank of America and Fleet agreed to pay $675 million to settle allegations of improper mutual fund trading.
