Investment Adviser Sanctioned for Failure to Disclose Conflicted Revenue Arrangements

March 31, 2017

The SEC recently settled charges against an investment adviser (the “Adviser”) for failing to disclose to its clients compensation it received through arrangements with a third-party broker-dealer (the “Broker”) and the resulting conflicts of interest.

According to the SEC’s order, the Adviser retained the Broker to provide clearing and custody services for most of the Adviser’s advisory clients. The Adviser subsequently entered into an arrangement with the Broker to share with the Adviser revenues that the Broker received from its no-transaction-fee mutual funds (“NTF Funds”) program. Separately, the Adviser entered into an agreement to provide certain administrative services to the Broker in exchange for a percentage of service fees received by the Broker from certain NTF Funds. The SEC concluded that these payments created a conflict of interest in that they provided a financial incentive for the Adviser to favor NTF Funds over other investments when advising its advisory clients.

While the Adviser’s Form ADV Part 2A disclosed its relationship with the Broker (that is, to provide clearing and custody services) and that the no-transaction-fee feature of the NTF Funds may present the Adviser with an incentive to recommend NTF Funds, the Adviser failed to disclose that it received payments from the Broker based on the Adviser’s client assets invested in the NTF Funds or that these payments presented an additional conflict of interest. The SEC further noted that the Adviser’s client advisory agreements lacked such disclosures.

As a result, the SEC concluded that the Adviser violated the anti-fraud provisions in Section 206(2) and Section 207 of the Investment Advisers Act of 1940 (the “Advisers Act”). The SEC also found that the Adviser violated Section 206(4) and Rule 206(4)-7 of the Advisers Act by not adequately implementing policies and procedures reasonably designed to ensure proper disclosure of conflicts of interest.

In settling the charges, the Adviser agreed to pay $2.79 million in disgorgement and interest and a $300,000 civil money penalty.

Click here to access the SEC Order:


Enforcement Actions, Investment Advisers