Investment Adviser Settles SEC Charges for Brokerage Fee Disclosure Failures

An investment adviser settled SEC charges for failing to disclose to its clients compensation that its affiliated broker received for investments recommended to them by the adviser.

In the Administrative Order, the SEC found that the adviser bought, recommended or held for its clients mutual fund share classes that charged fees pursuant to ICA Rule 12b-1, which the adviser's affiliated broker then received, even though less expensive options were available. The SEC also claimed that the adviser recommended for its clients cash sweep money market funds for which its affiliated broker received payments from the adviser's clearing broker. The adviser did not disclose to its clients the compensation received by its affiliated broker for their investments, an omission which resulted in lower performance for some investors. The SEC determined that the adviser violated Sections 206(2) and 206(4) of the Investment Advisers Act for failing to (i) fulfill its duty to seek best execution for its clients and (ii) establish and maintain sufficient supervisory procedures to prevent its violations.

To settle the charges, the adviser agreed to (i) cease and desist from future violations, (ii) a censure, (iii) pay $767,192 in disgorgement, prejudgment interest and civil monetary penalties, and (iv) comply with the undertakings outlined in the Administrative Order.

Commentary

This case is another example of the SEC's continued focus on mutual fund share selection, specifically, and investment adviser conflicts of interest in general. The case is also the latest data point for evaluating the value investment advisers received for participating in the SEC's Share Class Selection Disclosure Initiative (previously discussed here and here). Under the initiative, companies who self-reported share selection violations were required to disgorge ill-gotten gains but were not required to pay a civil penalty. Here, the investment adviser - who the SEC noted was eligible to participate in the initiative but elected not to self-report - paid a $200,000 penalty in addition to disgorgement and prejudgment interest of more than $550,000.

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