Investment Adviser Settles SEC Charges for Multiple 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.

According to the Order, the SEC found that the adviser invested clients' funds in mutual fund share classes and money market fund shares pursuant to a revenue sharing agreement between the affiliated broker and its unaffiliated clearing broker rather than advising the clients of the availability of similar share classes offered through the broker's no-transaction-fee program. The SEC found that the adviser failed to disclose this or the conflicts of interest related to it. The SEC determined that the adviser breached its fiduciary duty to seek best execution by investing in less favorable share classes than the best available, as well as failing to maintain supervisory policies reasonably designed to prevent best execution violations with respect to share class selection.

The SEC also found that the adviser engaged in transactions with its affiliated broker-dealer on a principal basis without first notifying and obtaining consent from each client. The SEC added that the broker-dealer profited from the transactions.

As a result, the SEC determined that the adviser violated Sections 206(2) and 206(4) of the 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 order and censure, (ii) a civil monetary penalty totaling $938,756 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.