Investment Adviser Settles SEC Charges for Revenue Sharing and Conflicts of Interest Violations

An investment adviser settled SEC charges for failing to fully and fairly disclose conflicts of interest concerning "its affiliated broker-dealer's receipt of revenue resulting from advisory clients' assets in cash sweep products."

According to the Order, from December 2015 to March 2022, the adviser's affiliated broker-dealer participated in a cash sweep revenue sharing arrangement with its clearing broker. The SEC found that through the program, (i) uninvested cash from the adviser's clients would automatically transfer to one or more FDIC-insured deposit accounts or to a money market mutual fund; (ii) depending on the amount of assets in these cash sweep products, the clearing broker would pay revenue sharing to the adviser's affiliate broker-dealer and retain the first 20 basis points; and (iii) if the cash sweep product vendor's payment exceeded these 20 basis points, the clearing broker would share excess revenue with the adviser's affiliated broker-dealer. The SEC concluded that this arrangement incentivized the adviser to prioritize this cash program over other investments.

As a result of this conduct, the SEC found that the adviser violated its fiduciary duty and willfully violated Sections 206(2) and 206(4) ("Prohibited transactions by investment advisers") of the Advisers Act and Rule 206(4)-7 ("Compliance procedures and practices") thereunder.

To settle the charges, the adviser agreed to (i) cease and desist from future violations, (ii) a censure and (iii) disgorgement, prejudgment interest and a civil penalty for a total of $214,460.07.