SEC Settles Charges with Adviser for Failing to Disclose Conflicts of Interest

Who may be interested: Investment Advisers; Registered Investment Companies; Boards of Directors

Quick Take: The SEC recently settled charges with an investment adviser relating to the adviser’s failure to disclose conflicts of interest to its clients concerning compensation the adviser received from an ETF investment manager, including through a sub-advisory agreement with the ETF manager.

According to the SEC’s order, the adviser offered its clients the opportunity to invest in proprietary model portfolios, which were comprised of ETFs and other securities. In October 2020, the adviser received an “onboarding fee” from the ETF manager in exchange for making the ETFs advised by the ETF manager available as investments in the adviser’s portfolio models. Shortly thereafter, the adviser became the sub-adviser to one of the funds advised by the ETF manager. Under the sub-advisory agreement, the adviser received a sub-advisory fee from the ETF manager equal to 25% of the net revenues earned from the fund, with a step up to 30% of the net revenues for any month where fund assets were over $150 million. The SEC order found that both arrangements created conflicts of interest because they created an incentive for the adviser to use funds managed by the ETF manager in the portfolio models.

When the adviser first disclosed the onboarding fee in its Form ADV, the disclosure stated that the onboarding fee created a “potential conflict of interest” which the SEC’s order stated was inadequate because an actual conflict of interest existed. With respect to the sub-advisory agreement, the adviser initially failed to disclose the agreement in its Form ADV, while disclosing the existence of the agreement in its quarterly performance reports at the time. As described by the SEC’s order, the adviser did not fully and fairly disclose the onboarding fee and the related conflicts of interest until March 2023 and did not fully and fairly disclose the terms of the sub-advisory agreement and the related conflicts of interest until August 2022. The SEC’s order also found that the adviser failed to implement written compliance policies and procedures related to the disclosure of conflicts of interest.

As a result of the alleged 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. Without admitting or denying the findings set forth in the SEC’s order, the adviser agreed to a cease-and-desist order, a censure, and to pay approximately $285,000 in disgorgement, prejudgment interest, and civil penalties.

The SEC’s order can be found here.