UNITED STATES OF AMERICA

UNITED STATES OF AMERICA

Before the

SECURITIES AND EXCHANGE COMMISSION

SECURITIES EXCHANGE ACT OF 1934

Release No. 95046 / June 6, 2022

INVESTMENT ADVISERS ACT OF 1940

Release No. 6044 / June 6, 2022

ADMINISTRATIVE PROCEEDING

File No. 3-20881

CORRECTED ORDER INSTITUTING

ADMINISTRATIVE AND CEASE-ANDDESIST PROCEEDINGS, PURSUANT

TO SECTION 15(b) OF THE

SECURITIES EXCHANGE ACT OF 1934

AND SECTIONS 203(e), 203(f) AND

203(k) OF THE INVESTMENT

ADVISERS ACT OF 1940, MAKING

FINDINGS, AND IMPOSING

REMEDIAL SANCTIONS AND A

CEASE-AND-DESIST ORDER

In the Matter of

KATHRYN JANE

MEREDITH, d/b/a

KM ADVISORY

SERVICES,

Respondent.

I.

The Securities and Exchange Commission (“Commission”) deems it appropriate and in

the public interest that public administrative and cease-and-desist proceedings be, and hereby

are, instituted pursuant to Section 15(b) of the Securities Exchange Act of 1934 (“Exchange

Act”) and Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 (“Advisers Act”)

against Kathryn Jane Meredith, d/b/a KM Advisory Services (“Respondent”).

II.

In anticipation of the institution of these proceedings, Respondent has submitted an Offer

of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the

purpose of these proceedings and any other proceedings brought by or on behalf of the

Commission, or to which the Commission is a party, and without admitting or denying the

findings herein, except as to the Commission’s jurisdiction over it and the subject matter of these

proceedings, which are admitted, Respondent consents to the entry of this Order Instituting

Administrative and Cease-and-Desist Proceedings, Pursuant to Section 15(b) of the Securities

Exchange Act of 1934 and Sections 203(e) and 203(k) of the Investment Advisers Act of 1940,

Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as

set forth below.

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III.

On the basis of this Order and Respondent’s Offer, the Commission finds1 that

Summary

1.

These proceedings arise out of breaches of fiduciary duties by former registered

investment adviser KM Advisory Services (“KMA”), an unincorporated sole-proprietorship owned

by Kathryn Jane Meredith (“Meredith”) from 1994 through February 2020, in connection with

KMA’s receipt of mutual fund fees pursuant to Rule 12b-1 under the Investment Company Act of

1940 (“12b-1 fees”) and commissions in the form of sales “loads” from advisory client investments

without fully and fairly disclosing its related conflicts of interest. Since at least January 2016,

KMA invested the vast majority of clients’ assets in certain mutual funds that paid 12b-1 fees and

charged sales load commissions exclusively through an introducing broker-dealer (the

“Introducing Broker-Dealer”), with whom Meredith was a registered representative. As a result,

KMA’s clients paid 12b-1 fees and commissions to the Introducing Broker-Dealer, a portion of

which were shared with KMA. KMA failed to fully and adequately disclose this arrangement and

the conflicts of interest arising therefrom. KMA also breached its duty of care by not routinely

comparing the Introducing Broker-Dealer’s order execution with other broker-dealers, which

KMA’s advisory relationship with its clients required. KMA therefore caused its advisory clients

to invest through the Introducing Broker-Dealer and in share classes of mutual funds that charged

12b-1 fees when other broker-dealers made available share classes of the same funds to their

customers that may have presented a more favorable value for KMA’s clients under the particular

circumstances in place at the time of the transactions. KMA, although eligible to do so, did not

self-report to the Commission, pursuant to the Division of Enforcement’s (the “Division”) Share

Class Selection Disclosure Initiative (“SCSD Initiative”).2 Furthermore, KMA failed to adopt and

implement written compliance policies and procedures reasonably designed to prevent violations

of the Advisers Act and the rules thereunder in connection with its mutual fund share class and

broker-dealer selection practices. As a result of the conduct described above, KMA willfully

violated Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder.

Respondent

2.

KM Advisory Services was an investment adviser operating as a sole proprietorship

with a primary place of business in Victor, New York. Meredith, 78 years old, founded KMA in

1994 and owned it through February 2020. KMA was registered with the Commission as an

investment adviser from 1996 until August 2021, when it ceased operations and filed a Form

ADV-W. As of February 2020, when Meredith sold KMA, KMA managed 216 advisory clients

with over $167 million in assets. Meredith currently resides in Palmetto, Florida. Meredith

previously held Series 7, 24 and 63 licenses and had been a registered representative of the

Introducing Broker-Dealer from 1994 until November 2021.

The findings herein are made pursuant to Respondent’s Offer and are not binding on any other person or entity in

this or any other proceeding.

1

See Div. of Enforcement, U.S. Sec. & Exch. Comm’n, Share Class Selection Disclosure Initiative,

https://www.sec.gov/enforce/announcement/scsd-initiative (last modified Feb. 12, 2018).

2

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Facts

Background on Mutual Fund Share Classes

3.

Mutual funds offer investors different “share classes.” Each share class represents

an interest in the same portfolio of securities with the same investment objective. The primary

difference among the share classes is the fee structure. For example, some mutual fund share

classes have 12b-1 fees or shareholder servicing fees to cover fund distribution or sometimes

shareholder services (hereinafter, “Retail Class”). The 12b-1 fees are included in a mutual fund’s

total annual fund operating expenses for that class, and typically range from 0.25% to 1%. The

12b-1 fees are deducted from the mutual fund’s assets attributed to that class on an ongoing basis

and paid to the fund’s distributor or principal underwriter, which generally remits the 12b-1 fees to

the broker-dealer that distributed or sold the shares. Certain Retail Classes charge a fee or a sales

load that is calculated as a percentage of the purchase amount when investors buy shares of the

fund (a “front-end load”). Front-end loads may have discounts (referred to as “breakpoints”)

available to the investor as a result of the total amount invested. Another type of Retail Class

charges a contingent deferred sales charge (“CDSC”), a deferred sales charge the purchaser pays if

the purchaser sells the shares during a specified time period following the purchase.

4.

Many mutual funds also offer share classes that charge lower fees overall and that

do not charge 12b-1 or shareholder servicing fees (e.g., “Institutional Class” or “Class I” shares

(collectively, “Class I shares”)) or that waive sales loads (“Load-Waived shares”). An investor

who holds Class I shares of a mutual fund will usually pay lower total annual fund operating

expenses – and thus will almost always earn higher returns over time – than one who holds a Retail

Class of the same fund. Therefore, if a mutual fund offers a Class I share, and an investor is

eligible to own it, it is often, though not always, better for the investor to purchase or hold the

Class I share. Similarly, if a mutual fund offers Load-Waived share classes, and an investor is

eligible to own it, it is often, though not always, better for the investor to purchase the LoadWaived share class instead of the share class that charges sales loads. The cost of owning shares of

a mutual fund will depend on the expense ratio of the particular share class and any sales loads or

charges.

KMA’s Business

5.

Meredith established KMA as a sole proprietorship in 1994 to provide financial

planning services (e.g. retirement planning, estate planning and tax consulting services) and also

investment advisory services on a discretionary basis to individual clients. Except for its services

rendered to retirement plan clients, which accounted for roughly 10% to 20% of KMA’s business,

KMA exclusively used the Introducing Broker-Dealer. The Introducing Broker-Dealer used a

clearing broker that provided the Introducing Broker-Dealer with access to a variety of mutual fund

share classes, including I Class shares and Load-Waived shares for advisory clients. However, the

Introducing Broker-Dealer, which is dually-registered as a broker-dealer and investment adviser

with its own advisory platform, limited access to I Class shares and Load-Waived Shares to clients

with accounts on its advisory platform; the Introducing Broker-Dealer provided only Retail Class

shares to brokerage account holders. As such, the Introducing Broker Dealer did not allow KMA

to select I Class shares and Load-Waived shares for its clients.

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6.

Since at least January 2016 and continuing through February 2020 when Ms.

Meredith sold her interests in KMA (the “Relevant Period”), prospective KMA non-retirement

plan advisory clients with mutual fund assets to be under KMA’s management were required to

open brokerage accounts at the Introducing Broker-Dealer with Meredith as the Introducing

Broker-Dealer’s registered representative. Because of this arrangement, only Retail Class shares

were available to these clients.

7.

KMA derived its revenue from four sources: (1) a disclosed advisory fee of 0.5% of

clients’ assets under management; (2) one-time financial planning fees paid by clients at the onset

of the advisory relationship; (3) 12b-1 fees that its clients paid from their mutual fund holdings;

and (4) sales loads its clients paid on mutual fund purchases. During the Relevant Period, KMA

received advisory fee revenue directly in a bank account in Meredith’s and KMA’s name, and the

Introducing Broker-Dealer received 12b-1 fee payments and sales loads from KMA’s clients’

accounts. Per agreement between Meredith and the Introducing Broker, the Introducing BrokerDealer shared with Meredith the 12b-1 fee payments and sales loads in her capacity as a registered

representative. Meredith’s portion of the 12b-1 fees and sales load commissions were remitted to a

bank account held by KMA’s business operating entity, which Meredith owned. The Introducing

Broker-Dealer retained a portion the 12b-1 fee payments and sales loads for itself.

8.

During the Relevant Period, the vast majority of advisory assets that KMA

recommended that its clients purchase were mutual fund share classes that charge sales loads

and/or 12b-1 fees. Specifically, during the Relevant Period, KMA placed the majority of client

assets in C Class shares, which typically charge 12b-1 fees of 1% on client holdings and charge a

1% CDSC for a specified time period. KMA placed the remaining client assets in A Class shares,

which typically charge sales loads of 5% at the time of purchase and 12b-1 fees of 0.25% per year

on client holdings. In most instances, KMA recommended A Class shares only when the client

was eligible for a discount due to a breakpoint, which reduced the cost to the client of holding A

Class shares. Most clients paid sales loads of 3.5% or less, and some paid sales loads of 0%.

9.

During the Relevant Period, KMA stated to its clients that it would “routinely”

compare the Introducing Broker-Dealer’s order execution with other broker-dealers to “ensure”

that the Introducing Broker-Dealer remained competitive in providing best execution for KMA’s

clients, but KMA did not routinely do so. KMA analyzed mutual fund share classes available at

other broker-dealers only once (in August 2017). In connection with this analysis, KMA did not

assess the impact of using another broker-dealer on any actual KMA client accounts. During the

Relevant Period, KMA did not recommend that its clients open accounts with another brokerdealer that would provide clients with access to Load-Waived Shares or share classes that do not

charge 12b-1 fees.

10.

During the Relevant Period, KMA derived a significant percentage of its revenue

from 12b-1 fees. During the Relevant Period, Meredith received a significant percentage of her

total compensation from 12b-1 fees and sales loads that the Introducing Broker-Dealer charged

KMA’s advisory clients.

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KMA’s Disclosure Failures

Disclosures Regarding KMA’s Receipt of 12b-1 Fees

11.

KMA represented in its Form ADV Part 2A Brochures (“Brochures”) from at least

January 2016 through March 2019 that:

“Although not a material consideration in recommending and/or selecting

a particular mutual fund for the Account, KMA and its Advisors may

receive a portion of the 12b-1 distribution fees or other fees imposed by

the mutual fund and paid by the mutual fund or one of their affiliates…”

Elsewhere the Brochures stated “[Introducing Broker-Dealer], as well as KMA's Advisors, may

receive additional ongoing 12b-1 trail commissions on mutual fund purchases during the period

that the client maintains the mutual fund investment.”

12.

These disclosures did not adequately disclose all material facts regarding the

conflicts of interest that arose when it invested advisory clients through the Introducing BrokerDealer in a mutual fund share class that would generate and pay 12b-1 fees to KMA while share

classes of the same funds were available through other broker-dealers that did not pay or paid less

12b-1 fees. In addition, KMA’s disclosures stated that it “may receive a portion of the 12b-1

distribution fees” when it actually did and would receive a portion of the 12b-1 fees KMA’s clients

paid.

13.

In October 2019, KMA amended its Brochure disclosures related to 12b-1 fee

revenue to state the following:

“Through [Introducing Broker-Dealer], mutual fund investments can be

invested in various share classes: A, B, C, and M. These share classes

have different [characteristics] that can include up-front commission

charges and back-end sales charges. In addition, these share classes

include l2b-l fees that are paid to the broker dealer and the advisor…

Clients are able to purchase the same or similar products through other

brokers and investment advisors. Other brokers and investment advisors

may offer shares class options that have a lower cost. For example, KMA

does not have access to institutional, advisor or clean share classes.

Similarly, investment advisory service fees charged by other investment

advisors may be similar to or lower than the fees that KMA charges.”

KMA’s revised disclosures, while an improvement, still did not adequately disclose all material

facts regarding the conflicts of interest that arose when it invested advisory clients through the

Introducing Broker-Dealer in a mutual fund share class that would generate and pay 12b-1 fees

to KMA while share classes of the same funds were available through other broker-dealers that

did not pay or paid less 12b-1 fees.

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Disclosures Regarding KMA’s Receipt of Commissions and Selection of the Introducing

Broker-Dealers

14.

KMA’s advisory agreements during the Relevant Period stated that:

“You have no obligation to implement recommendations by executing

transactions through [Introducing Broker-Dealer]. The Financial Advisor

generally seeks competitive commission rates. . . If you choose to effect

transactions with [Introducing Broker-Dealer], the Financial Advisor may

act as a Registered Representative of [Introducing Broker-Dealer]. In

connection with those transactions, [Introducing Broker-Dealer] may

collect transaction fees, and the Financial Advisor may receive

commissions.”

15.

KMA similarly stated in its Brochures during the Relevant Period that:

“Should the client desire, they could engage KMA's Advisor, Kathryn J.

Meredith, in her individual capacity as a registered representative of [Introducing

Broker-Dealer] to implement investment recommendations on a commission

basis. Clients choosing to purchase investment products through [Introducing

Broker-Dealer] will be charged brokerage commissions to effect these securities

transactions.”

16.

KMA’s Brochures during the Relevant Period further stated that “KMA’s Advisors

may recommend other broker/dealers to their advisory clients.” However, during the Relevant

Period, KMA required its non-retirement plan advisory clients with mutual fund assets to open

brokerage accounts at the Introducing Broker-Dealer and never recommended any other brokerdealer besides the Introducing Broker-Dealer to its non-retirement plan advisory clients with

mutual fund assets. In addition, KMA’s disclosures in its advisory agreements stated that it “may

receive commissions” when it actually did and would receive commissions in the form of sales

loads.

Duty of Care Failures

17.

An investment adviser’s fiduciary duty also includes a duty of care. To fulfill this

obligation, an adviser, among other things, must provide investment advice in the best interest of

its client based on the client’s objectives and seek best execution for client transactions.

18.

KMA’s advisory relationship with its clients specifically required it to “routinely

compare the order execution disclosure information of [Introducing Broker-Dealer] and [its

clearing firm] to other broker/dealers to ensure that [Introducing Broker-Dealer] and [its clearing

firm] remain competitive in providing best execution for their clients.” During the Relevant

Period, KMA did not routinely conduct comparisons of the Introducing Broker-Dealer’s execution

with other broker-dealers.

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Compliance Deficiencies

19.

During the Relevant Period, KMA failed to adopt and implement written

compliance policies and procedures reasonably designed to prevent violations of the Advisers Act

and the rules thereunder in connection with either (1) the disclosure of the conflicts of interest that

arose from its mutual fund and mutual fund share class selection practices or (2) seeking best

execution for client transactions in connection with selecting a broker-dealer for its advisory

clients.

Disgorgement

20.

The disgorgement and prejudgment interest ordered in Section IV is consistent with

equitable principles and does not exceed the Respondent’s net profits from the violations, and will

be distributed to harmed investors to the extent feasible. The Commission will hold funds paid

pursuant to Section IV in an account at the United States Treasury pending distribution. Upon

approval of the distribution final accounting by the Commission, any amounts remaining that are

infeasible to return to investors, and any amounts returned to the Commission in the future that are

infeasible to return to investors, may be transferred to the general fund of the U.S. Treasury,

subject to Section 21F(g)(3) of the Exchange Act.

Violations

21.

As a result of the conduct described above, Respondent willfully violated Section

206(2) of the Advisers Act, which makes it unlawful for any investment adviser, directly or

indirectly, to “engage in any transaction, practice or course of business which operates as a fraud or

deceit upon any client or prospective client.” Scienter is not required to establish a violation of

Section 206(2), but rather a violation may rest on a finding of negligence. SEC v. Steadman, 967

F.2d 636, 643 n.5 (D.C. Cir. 1992) (citing SEC v. Capital Gains Research Bureau, Inc., 375 U.S.

180, 194-95 (1963)).

22.

As a result of the conduct described above, Respondent willfully violated Section

206(4) of the Advisers Act and Rule 206(4)-7 thereunder, which require a registered investment

adviser to adopt and implement written compliance policies and procedures reasonably designed to

prevent violations of the Advisers Act and the rules thereunder.

IV.

In view of the foregoing, the Commission deems it appropriate, and in the public interest

to impose the sanctions agreed to in Respondent’s Offer.

Accordingly, pursuant to Section 15(b) of the Exchange Act and Sections 203(e), 203(f)

and 203(k) of the Advisers Act, it is hereby ORDERED that:

A.

Respondent cease and desist from committing or causing any violations and any

future violations of Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-7 promulgated

thereunder.

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B.

Respondent is censured.

C.

Respondent shall, within 10 days of the entry of this Order, pay disgorgement,

prejudgment interest and civil money penalties as follows:

(1)

Respondent shall, within 10 days of the entry of this order, pay

disgorgement of $574,743.53 and prejudgment interest of $77,252.39 to

the Securities and Exchange Commission. If timely payment is not made,

additional interest shall accrue pursuant to SEC Rule of Practice 600.

(2)

Respondent shall, within 10 days of the entry of this order, pay a civil

money penalty in the amount of $100,000 to the Securities and Exchange

Commission. If timely payment is not made, additional interest shall

accrue pursuant to 31 U.S.C. § 3717.

(3)

Payment must be made in one of the following ways:

(a)

Respondent may transmit payment electronically to the

Commission, which will provide detailed ACH transfer/Fedwire

instructions upon request;

(b)

Respondent may make direct payment from a bank account via

Pay.gov through the SEC website at

http://www.sec.gov/about/offices/ofm.htm; or

(c)

Respondent may pay by certified check, bank cashier’s check, or

United States postal money order, made payable to the Securities

and Exchange Commission and hand-delivered or mailed to:

Enterprise Services Center

Accounts Receivable Branch

HQ Bldg., Room 181, AMZ-341

6500 South MacArthur Boulevard

Oklahoma City, OK 73169

Payments by check or money order must be accompanied by a cover letter

identifying Kathryn Jane Meredith d/b/a KM Advisory Services as

Respondent in these proceedings, and the file number of these

proceedings; a copy of the cover letter and check or money order must be

sent to Andrew B. Dean, Assistant Regional Director, Division of

Enforcement, Securities and Exchange Commission, 100 Pearl Street,

Suite 20-100, New York, NY 10004.

(5)

Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, as

amended, a Fair Fund is created for the penalties, disgorgement, and

prejudgment interest referenced in this Section IV, paragraph C and

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combined with the Fair Fund established in the Commission’s

simultaneously instituted related proceeding, In the Matter of John Paul

Harnish, d/b/a KM Advisory Services, Admin. Proc. No. 3-20882 (June 6,

2022) to form the KM Advisory Fair Fund. Amounts ordered to be paid

as civil money penalties pursuant to this Order shall be treated as penalties

paid to the government for all purposes, including all tax purposes. To

preserve the deterrent effect of the civil penalty, Respondent agrees that in

any Related Investor Action, she shall not argue that she is entitled to, nor

shall she benefit by, offset or reduction of any award of compensatory

damages by the amount of any part of Respondent’s payment of a civil

penalty in this action (“Penalty Offset”). If the court in any Related

Investor Action grants such a Penalty Offset, Respondent agrees that she

shall, within 30 days after entry of a final order granting the Penalty

Offset, notify the Commission’s counsel in this action and pay the amount

of the Penalty Offset to the Securities and Exchange Commission. Such a

payment shall not be deemed an additional civil penalty and shall not be

deemed to change the amount of the civil penalty imposed in this

proceeding. For purposes of this paragraph, a “Related Investor Action”

means a private damages action brought against Respondent by or on

behalf of one or more investors based on substantially the same facts as

alleged in the Order instituted by the Commission in this proceeding.

V.

It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section

523 of the Bankruptcy Code, 11 U.S.C. § 523, the findings in this Order are true and admitted by

Respondent Meredith, and further, any debt for disgorgement, prejudgment interest, civil penalty or

other amounts due by Respondent Meredith under this Order or any other judgment, order, consent

order, decree or settlement agreement entered in connection with this proceeding, is a debt for the

violation by Respondent Meredith of the federal securities laws or any regulation or order issued

under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. § 523(a)(19).

By the Commission.

Vanessa A. Countryman

Secretary

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