The Securities and Exchange Commission today announced that three subsidiaries of Hartford Financial Services Group, Inc. will pay $55 million to settle charges that they misrepresented and failed to disclose to fund shareholders and the funds' Boards of Directors their use of fund assets to pay for the marketing and distribution of Hartford mutual funds and annuities.
The three subsidiaries, Hartford Investment Financial Services, LLC (Hartford Investment), HL Investment Advisors, LLC (HL Advisors) and Hartford Securities Distribution Company, Inc. (Hartford Distribution) (collectively, Hartford), agreed to relinquish $40 million in ill-gotten gains and pay a $15 million penalty. The entire $55 million will be distributed to the affected Hartford funds.
Linda Thomsen, Director of the Commission's Division of Enforcement, said, "Hartford told the fund investors that shareholders would not pay for the marketing and distribution of fund shares, but then used the funds' assets rather than Hartford's own assets to meet its shelf space obligations. Such misrepresentations cannot be tolerated. Our action today sends a strong message about the importance of providing proper disclosure to fund Boards and fund investors."
Merri Jo Gillette, Regional Director of the Commission's Midwest Regional Office, added, "Investment advisers need to make clear and complete disclosures about the use of fund assets. This settlement confirms the Commission's commitment to ensuring that mutual fund shareholders receive full and accurate information so they can make informed investment decisions."
According to an Order issued by the Commission, between 2000 and 2003, Hartford entered into arrangements with 61 broker-dealers pursuant to which it agreed to pay for special marketing and distribution benefits, known as "shelf space." Hartford represented to shareholders in the funds' prospectuses that it used its own assets to pay for shelf space and that shareholders did not pay for shelf space. Hartford failed to disclose that instead of using only its own assets, Hartford directed approximately $51 million of the Hartford funds' assets, in the form of brokerage commissions, to certain broker-dealers in order to satisfy some of Hartford's shelf space obligations.
Hartford also failed to disclose to the funds' Boards its practice of directing the funds' brokerage commissions to broker-dealers in exchange for shelf space. By failing to disclose this practice to the Boards, Hartford Investment and HL Advisors breached their fiduciary duties to the funds' Boards and deprived the funds' Boards of the opportunity to determine the best use of fund assets. Hartford Distribution, the distributor and principal underwriter for some of the funds, aided and abetted Hartford Investment and HL Advisors violations. Despite its duty to do so, Hartford Distribution also failed to disclose these arrangements to the funds' Boards.
In addition to the $55 million payment, Hartford Investment and HL Advisors were censured and ordered to cease and desist from committing or causing violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, Section 206(2) of the Investment Advisers Act, and Section 34(b) of the Investment Company Act. Hartford Distribution was also censured and ordered to cease and desist from committing or causing violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 and from causing violations of Section 206(2) of the Investment Advisers Act. The Commission's Order further requires Hartford Investment, HL Advisors and Hartford Distribution to undertake certain compliance reforms. Hartford Investment, HL Advisors and Hartford Distribution have consented to the issuance to the Commission's Order, without admitting or denying the findings contained therein.
