Adviser Settles SEC Charges over Undisclosed Conflicts of Interest

An investment adviser and its former chief executive settled SEC charges for failing to disclose conflicts of interest, and for personally trading an adviser recommended exchange-traded fund without preclearance.

The SEC found that during the relevant period, the adviser did not disclose: (i) that its majority owner held a profit-sharing interest in a sub-adviser whose model portfolio the adviser recommended; (ii) an expense-sharing arrangement with another adviser that gave it an incentive to promote four of its own ETFs; and (iii) its former chief investment officer (an "access person") had ties to advisers whose funds the adviser recommended.

The SEC also found that the CEO, who was also the majority owner, personally traded the ETF on 87 days during the relevant period without pre-clearing the trades as required by the firm's policies and procedures, and that on 33 occasions his end-of-day purchase was the last trade of the day and matched the closing price. The SEC said that at the end of the period the adviser's clients held about 80 percent of the ETF's outstanding float. 

Further, the SEC found the adviser failed to implement its conflict-disclosure policies, skipped a required compliance review, and did not enforce its code of ethics, including pre-clearance of personal trades. The SEC found the advisor and CEO "negligently breached their fiduciary duties."

The SEC determined the adviser violated Advisers Act Section 206(2) and 206 (4) ("Prohibited transactions by investment advisers") and Section 204A and Rule 204A-1 ("Prevention of misuse of nonpublic information"); the owner willfully violated Sections 206(2) and 204A and caused certain of the adviser's violations.

The adviser consented to a censure and cease-and-desist order, $152,628 in disgorgement plus interest, and a $1.2 million penalty. The owner consented to a censure, $434,162 in disgorgement plus interest, and a $354,675 penalty.