Bank Custodian Pays Penalty for Customer's Failure to Disclose Excessive Mutual Fund Sales Fees

In a settlement reached with the SEC, Regions Bank (Regions) agreed to pay a fine in a case alleging that Region's customer, U.S. Pension Trust Corp. and U.S. College Trust Corp. (collectively “USPT”), defrauded approximately 14,000 investors by charging excessive, undisclosed commissions and fees in connection with the sale of mutual funds available from well-known U.S. fund companies.

USPT offers and sells these mutual funds to investors primarily residing in Latin America through a series of retirement and college investment plans, allowing investors to make investments either in one lump-sum or through annual contributions. USPT employed U.S. banks to serve as trustees of the investment plans, with a bank entering into an individual trust agreement with each investor.

As a primary selling point of its plans, USPT assured investors that their investments would be safe because of this direct trust relationship with a U.S. bank. Until March of 2006, USPT did not disclose to new investors that it took up to 85% of an investor’s annual contributions, and up to 18% of lump-sum contributions, in fees and commissions. USPT used these fees to pay profits to itself, sales commissions to its agents and insurance premiums to a company owned by USPT principals (the plans also included an insurance component). Until 2006, USPT did not disclose in any of its materials the fees and commissions that it charged to investors. While USPT revised its materials in 2006 to disclose the existence of these fees, it did not provide this new disclosure to existing investors that continued to make contributions under the plans.

Beginning in 2001, Regions (or its predecessor) served as trustee of several USPT plans, entering into thousands of trust agreements with investors. Pursuant to a master agreement between USPT and Regions, Regions would receive contributions from investors, deposit these funds into a Regions account, and forward to USPT, per USPT’s instructions, the amounts representing the undisclosed fees, commissions and profits. The master agreement was written in English and was not provided to investors. After the transactions were processed, Regions would send a signed certificate to each investor acknowledging the creation of a trust account and confirming the total amount of the investor’s contribution. The certificate, however, did not disclose the amount of the contribution that was used to pay USPT’s fees and costs.

The SEC argued that USPT violated Sections 17(a)(2) and 17(a)(3) of the Securities Act, which prohibits any person from obtaining money by means of an untrue statement or material omission in the offer or sale of securities, and any course of business which would operate as a fraud upon actual or potential purchasers. Furthermore, the SEC argued that USPT violated Section 15(a)(1) of the Exchange Act, which prohibits any broker or dealer from using interstate commerce to induce the purchase or sale of any security unless the broker or dealer is registered in accordance with Section 15(b) of the Exchange Act. The SEC alleged that Regions knew, or should have known, that the excessive fees were not disclosed in USPT’s marketing materials or any other materials provided to investors.

Under Section 8A of the Securities Act and Section 21C of the Exchange Act, the SEC may issue a cease-and-desist order against a person that is the cause of another person’s violation due to an act or omission that the person knew or should have known would have contributed to the violation. The SEC alleged that Regions was a cause of USPT’s violations, and Regions agreed to settle the charges by consenting to the entry of the cease-and-desist order and payment of a $1 million penalty.