Investment Adviser Settles SEC Charges for Mutual Fund Conflicts of Interest and Disclosure Failures

An investment adviser settled SEC charges for failing to fully disclose compensation paid to its affiliated broker-dealer for certain mutual fund transactions and related conflicts of interest.

In the Order, the SEC found that the adviser invested clients' funds in mutual fund share classes that incurred a higher fee for the benefit of a revenue sharing agreement between the affiliated broker and its unaffiliated clearing broker, despite the same share classes being offered through the broker's no transaction fee program.

The SEC determined that the adviser failed to disclose to clients information regarding conflicts of interest that arose when the adviser invested clients in mutual funds and mutual fund share classes that paid revenue sharing to its affiliated broker. The SEC found that the adviser breached its fiduciary duty to seek best execution by investing in less favorable share classes than the best available.

The SEC determined that the adviser failed to maintain supervisory policies reasonably designed to prevent best execution violations with respect to share class selection.

As a result, the SEC determined the adviser violated Sections 206(2) and 206(4) of the Investment Advisers Act ("Prohibited transactions by investment advisers") and IAA Rule 206(4)-7 ("Compliance procedures and practices").

To settle the charges, the adviser agreed to (i) a cease-and-desist and censure, (ii) a civil monetary penalty totaling $752,834 and (iii) undertakings to revise its supervisory policies to prevent violations of the Advisers Act and the rules thereunder in connection with revenue sharing and best execution.