Source: Securities and Exchange Commission
Litigation Release No. 24985 / December 15, 2020
Securities and Exchange Commission v. CapWealth Advisors, LLC, Timothy J. Pagliara, and Timothy R. Murphy, Civil Action No. 3:20-cv-01064 (M.D. Tenn. filed December 11, 2020)
The Securities and Exchange Commission today charged Franklin, Tennessee-based registered investment adviser CapWealth Advisors, LLC, its principal, Timothy J. Pagliara, and an advisory representative, Timothy R. Murphy, in connection with their mutual fund share class selection practices.
The SEC’s complaint alleges that, from at least June 2015 until June 2018, CapWealth, Pagliara and Murphy, failed to adequately disclose conflicts of interest arising from their selection of mutual fund share classes that charged 12b-1 fees, instead of lower-cost share classes of the same funds that were also available to clients. According to the complaint, those 12b-1 fees were paid to an affiliated broker-dealer under common ownership and control with CapWealth, which in turn paid some of the fees directly to Murphy as compensation, and indirectly to Pagliara, through his majority stake in CapWealth’s holding company. In addition, the complaint alleges that CapWealth, Pagliara and Murphy breached their duty to seek best execution for their clients’ mutual fund share class purchases by causing certain advisory clients to invest in fund share classes that charged 12b-1 fees when share classes of the same funds that presented a more favorable value for the clients were available.
According to the complaint, CapWealth also failed to adopt and implement written policies and procedures designed to prevent these violations. CapWealth was eligible to self-report to the SEC pursuant to the Division of Enforcement’s Share Class Selection Disclosure Initiative, but did not do so.
The Complaint alleges that CapWealth, Pagliara and Murphy violated Section 206(2) of the Investment Advisers Act of 1940, and that CapWealth also violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder. The SEC seeks financial penalties against CapWealth, Pagliara and Murphy, as well as disgorgement of ill-gotten gains plus prejudgment interest from Pagliara and Murphy.
The SEC’s investigation was conducted by Brian M. Basinger and Stephen E. Donahue of the Atlanta Regional Office, with assistance from Cathy Niden and Ross Goetz of the Division of Economic and Risk Analysis, and under the supervision of the SEC’s Asset Management Unit. The litigation will be led by Senior Trial Counsel Kristin W. Murnahan. The examination that led to the investigation was conducted by John Adams, Robert Cowdin and Satyan Singh of the Atlanta Regional Office, and was supervised by Samara Ross.