SEC Fines Advisor for Failing to Disclose Conflicts of Interest
An advisory firm settled SEC charges for failing to adequately disclose conflicts of interest in connection with its fee-based, portfolio management, Personal Advisor Services ("PAS") program.
According to the cease-and-desist Order, the firm’s performance review system incentivized advisors to enroll and retain clients in PAS, with High Net Worth advisors eligible for bonuses and Mass Affluent advisors eligible for merit raises and promotions. The SEC determined that these incentives created conflicts of interest that were not clearly or consistently disclosed. The SEC found that while the firm’s PAS Brochure referenced discretionary or variable bonuses, its Form CRS, brochure supplement, and marketing materials stated that advisors received no additional compensation.
The SEC also found that the firm lacked written policies and procedures to identify and address such conflicts of interest. The SEC observed that although the firm eventually revised disclosures, updated its website, and retained a consultant, these measures came only after extended periods of inconsistent representations.
As a result, the SEC charged the firm with willfully violating Advisers Act Sections 206(2) and 206(4) ("Prohibited transactions by investment advisers") and rule 206(4)-7 ("Compliance procedures and practices") thereunder.
The firm consented to the SEC’s Order, which imposes: (i) a cease-and-desist from future violations; (ii) a censure; and (iii) payment of a $19.5 million civil penalty to be distributed to affected clients through a Fair Fund.