Investment Adviser and Principal Settle SEC Charges for Best Execution Violations

An investment adviser and its principal owner settled SEC charges for best execution failures and failing to disclose conflicts of interest arising from the use of an affiliated broker-dealer.

In the Order, the SEC found that the investment adviser failed to fairly and fully disclose material facts to clients in its brochures and advisory agreements. The SEC said the adviser failed to include disclosures that informed clients that (i) the brokerage rate for the affiliated broker-dealer was higher than other fees offered by other broker-dealers, (ii) lower commission arrangements were available, and (iii) other clients may have been charged a lower fee.

In addition, the SEC stated that the principal failed to disclose that a larger commission would be received from the affiliated broker-dealer if clients were charged the higher rates, and that the adviser did not aggregate client transactions which would have resulted in the lowest fee paid by the client.

As a result, the SEC found that the adviser and its principal 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 and its principal agreed to (i) a cease-and-desist, (ii) a censure and (iii) pay disgorgement of $701,799, prejudgment interest of $146,100 and a civil penalty of $250,000.