Firm Settles SEC Charges for Losses Incurred as a Result of Complex Options Strategy

A dual-registrant settled SEC charges for (i) failing to adequately train its financial advisers on a complex options strategy sold to clients, and (ii) failing to implement a reasonable supervisory system that would provide adequate oversight.

In the Order, the SEC stated that the firm marketed the Yield Enhancement Strategy, an options overlay strategy designed to return high yields in a low market volatility environment, but did not provide adequate training or dedicated supervisory oversight to its financial advisors. The SEC found that the firm failed to adequately explain the significant downside risk of the strategy to financial advisers and clients. The strategy led to losses when the market became highly volatile, which caused certain clients to close their accounts. Certain clients asserted that they would not have invested in the strategy had they been informed of the significant downside risk.

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

To settle the charges, the investment adviser agreed to (i) cease and desist from committing further violations, (ii) accept a censure and (iii) pay disgorgement of $5,800,000, prejudgment interest of $1,400,000 and a civil penalty of $17,400,000.