Adviser Fined for Disclosure Failures and Unsuitable Recommendations

An investment adviser settled SEC charges for unsuitable recommendations to clients and for failing to disclose the higher fees on conversions from brokerage accounts to advisory accounts.

According to the SEC Order, during the relevant period, the investment adviser and one of its representatives converted over 180 brokerage accounts into advisory accounts without informing clients of the significantly higher fees. The SEC found that the improper conversions led to clients paying up to 10 times more in fees, totaling approximately $268,000, with no significant increase in services. The SEC said that many of the clients were elderly and long-time customers of the representative. The SEC also found that the representative received a substantial portion of the advisory fees collected from the converted accounts.

The SEC determined that the investment adviser failed to provide clients with investment management agreements specifying the advisory fees before charging them and, in some cases, omitted the fee information entirely. Additionally, the SEC said the investment adviser did not deliver required disclosures, including Form ADV brochures, at the time of account opening.

Further, the SEC found that the firm and representative failed to conduct suitability reviews, did not provide required disclosures and prioritized financial gain over client interests.

SEC determined the investment adviser violated Advisers Act Sections 204 ("Reports by investment advisers"), 206(2) and 206(4) ("Prohibited transactions by investment advisers") and Rules 204-3 ("Delivery of brochures and brochure supplements") and 206(4)-7 ("Compliance procedures and practices")

To settle the charges, the investment adviser agreed to (i) cease and desist from further violations, (ii) retain an independent compliance consultant to review its policies, (iii) notify affected clients and (iv) pay a civil monetary penalty of $150,000. The representative agreed to (i) a nine-month suspension from association with any investment adviser, broker, or dealer and (ii) pay a $75,000 civil monetary penalty.