SEC Files Cease-and-Desist Order Against an Investment Adviser for Failure to Disclose Referral Fees

September 26, 2007

On September 25, 2007, the U.S. Securities and Exchange Commission (“SEC”) filed a cease-and-desist order against an investment adviser for its failure to disclose that the investment adviser’s president received payments from a security issuer that the investment adviser recommended to its clients.

According to the SEC, the investment adviser described itself as a “fee-only” investment adviser that is “…only compensated by clients and receive nothing for the investments we recommend….” Additionally, the SEC asserted that the investment adviser filed annually the Form ADV Part I with the Commission for over six years that falsely stated that the investment adviser and its related persons were not paid commissions and didn’t recommend securities in which it had a sales interest. However, the president of the investment adviser allegedly entered into an agreement with a security issuer whereby the issuer would pay a referral fee for each client investing in issuer’s security based upon size of the investment. The SEC found that this arrangement resulted in the investment adviser receiving $361,307 in undisclosed referral fees from the security issuer.

Based on the receipt of the referral fees by the investment adviser’s president and the investment adviser’s failure to disclose such referral fees and misstatement that no such referral agreement existed, the SEC found that the investment adviser violated Section 206(1), Section 206(2) and Section 207 of the Investment Advisers Act of 1940. Accordingly, the SEC ordered a civil penalty of $40,000 and disgorgement of $361,307 for undisclosed referral fees from the investment adviser’s president.

This enforcement action clearly demonstrates the importance of accurately disclosing all forms of direct and indirect compensation received by an investment adviser and its related persons. If your registered investment adviser needs to update the compensation disclosures on its Form ADV, RIA Compliance Consultants offers Form ADV Review and Drafting services for existing investment advisers. For more information about our investment adviser compliance services, please call us at 877-345-4034.

Posted by Bryan Hill
Labels: Enforcement, Form ADV