Investment Adviser Charged for Failing to Disclose Revenue Sharing Arrangements and Related Conflicts of Interest

Who may be interested: Investment advisers.

Quick Take: The SEC announced settled charges against an investment adviser for the adviser’s breach of its fiduciary duty to its clients by failing to fully and fairly disclose conflicts of interest arising from the adviser’s receipt of financial incentives and compensation from clearing brokers in connection with the adviser’s 1) investment of client assets in cash sweep programs, 2) recommendation of margin loans to its clients, and 3) markup of postage and handling fees charged to the adviser’s clients by a clearing broker. 

The SEC announced that it settled charges against a registered investment adviser due to the adviser’s breach of its fiduciary duty to its clients by failing to adequately disclose revenue sharing payments and financial incentives the adviser received from its clearing brokers between at least February 2017 and September 2021. The SEC’s order found that the adviser had certain revenue sharing arrangements and incentive programs in place, under which, the adviser would receive revenue sharing payments and transaction fee discounts from its clearing brokers in connection with the placement of client assets in certain cash sweep programs, the recommendation of margin loans to clients, and the markup of postage and handling fees charged to clients by a clearing broker. The SEC’s order found that the adviser breached its fiduciary duty by failing to adequately disclose the existence of these financial incentives and revenue sharing arrangements, as well as the associated conflicts of interest which the arrangements created. According to the order, the adviser also failed to fully and fairly disclose its disciplinary history as well as the disciplinary histories of certain supervised persons and to implement written compliance policies and procedures related to the disclosure of compensation, conflicts of interest, and disciplinary histories. 

As a result of the above-mentioned conduct, the SEC’s order found that the adviser violated Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder. To settle the charges, the adviser consented to a cease-and-desist order and a censure, and agreed to pay disgorgement of approximately $1.4 million, prejudgment interest of $88,274 and a civil monetary penalty of $375,000. The adviser also agreed to distribute funds to harmed investors and comply with certain undertakings.

The SEC's order may be found here.