SEC Charges Adviser with Failure to Disclose Its True Ownership and Conflicts of Interest

July 2, 2014

The SEC brought an administrative action against SignalPoint Asset Management, LLC (SAM), and several related individuals (Principals) for failing to disclose the  individuals’ control of SAM and their conflicts of interest.  SAM is headquartered in Springfield, Missouri.

The Principals provided brokerage and advisory services as both registered representatives and investment adviser representatives (IARs) of a dually-registered broker-dealer and investment adviser (BD/IA Firm). The BD/IA denied the Principals’ request in August 2008 to start their own investment advisory firm. Nevertheless, the Principals formed and registered SAM by selecting three nominee owners to act as SAM’s majority members. The Principals provided all initial capital for SAM and engaged in other financial dealings with SAM and its members that evidenced their control over the firm. From the formation of SAM in August 2008 through at least 2013, the Principals also controlled SAM by actively participating in its operations and directing its management and policies. Specifically, the SEC found that:

  • The Principals actively participated in SAM’s annual and quarterly board meetings during which all points of operation were discussed, including SAM’s portfolio management, trading procedures, budget and financial projections, and sales and marketing strategies;
  • The Principals actively participated in decisions related to SAM’s personnel, including decisions affecting employee compensation, performance reviews, and job responsibilities. Similarly, the Principals assumed an active role in hiring and terminating SAM’s employees;
  • One of the Principals participated as a member of SAM’s investment committee, which met periodically to discuss portfolio construction and rebalancing and overall investment strategies;
  • The Principals actively participated in the sales and marketing decisions of SAM, including the creation of, and the participation on, a specific committee to assist SAM with its sales efforts; and
  • The Principals played an instrumental role in SAM’s decision to form another registered investment adviser to manage a registered investment company.

As IARs of the BD/IA Firm, the Principals were able to introduce their advisory clients to certain pre-approved third-party money managers. Through their agreements with the BD/IA Firm, the Principals earned advisory fees on client assets invested with those third-party money managers. After the BD/IA Firm approved SAM as a third-party money manager in October 2009, the Principals advised certain advisory clients to invest with SAM. Although the clients paid advisory fees to both the BD/IA Firm and SAM, the Principals adjusted the fees such that their clients were not disadvantaged by their investments with SAM.

The SEC stated that Item 10 of Form ADV, Part 1A requires that an adviser identify every person that “controls” the adviser. Form ADV defines the term “control” to mean “the power, directly or indirectly, to direct the management or policies of a person, whether through ownership of securities, by contract, or otherwise.” And according to Form ADV, “[a] person is presumed to control a limited liability company (‘LLC’) if the person…has contributed 25 percent or more of the capital of the LLC….”

Based on the Principals’ financial dealings with SAM and their participation in SAM’s operations and decision-making, the SEC stated that the Principals had the power to direct the management and policies of SAM, such that they “controlled” the entity as defined by Form ADV. Furthermore, the Principals controlled SAM by virtue of their loans to SAM, each of which accounted for more than a 25% contribution of the capital of SAM. However, during the relevant period, the SEC found that SAM failed to appropriately identify the Principals on its Forms ADV as persons who controlled its management and policies.

Beginning in March 2011 and subsequently throughout the relevant period, SAM filed with the SEC and delivered to clients and potential clients its Form ADV, Part 2A (i.e., its “firm brochure”). The SEC noted that SAM’s chief compliance officer was the individual responsible for drafting and filing SAM’s firm brochures. Item 10 of Form ADV, Part 2A requires that an adviser describe any relationship that is material to the adviser’s business or to its clients that the adviser has with any “related person” that is a broker-dealer or other investment adviser. Form ADV defines “related person” to include any “advisory affiliate,” and further defines “advisory affiliate” to include “all persons directly or indirectly controlling” an investment adviser.

In each of its firm brochures filed with the SEC during the relevant period, SAM’s response to item 10 disclosed that “SignalPoint receives periodic non-investment related business consulting from the principals of Walnut Capital Management, LLC.” However, the SEC stated that this disclosure was false and misleading because it: (a) did not accurately disclose the extent of the Principals’ ability to direct SAM’s management and policies; and (b) misrepresented that the Principals provided non-investment related consulting when, in fact, one of the Principals provided investment-related advice through his participation on SAM’s investment committee.

By failing to inform its clients and potential clients of the information described herein, the SEC stated that SAM breached its fiduciary duty and the Principals willfully violated Section 206(2) of the Advisers Act. The SEC also found that SAM and the chief compliance officer violated Section 207 of the Advisers Act, which makes it unlawful for any person willfully to make any untrue statement of a material fact in the Form ADV or to omit to state any material fact which is required to be stated therein.

Click here to access the administrative action.


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