SEC Issues Cease-and-Desist Order for Failure to Disclose Conflicts of Interest and Misrepresentation of Its Research Process

Recently, the U.S. Securities and Exchange Commission ("SEC") issued a cease-and-desist order, disgorgement to clients, prejudgment interest and penalties, among other sanctions against a registered investment adviser for its failure to disclose conflicts of interest in its selection of funds for discretionary clients and for providing misrepresentations to clients by stating that funds selected for model portfolios were chosen according to the firm's approved research process.

In the Matter of Banc of America Investment Services, Inc. and Columbia management Advisors, LLC, as successor in interest to Banc of America Capital Management, LLC (Rel. IA-2733/May 1, 2008; File No. 3-13030), the SEC alleges material misrepresentations and omissions by Banc of America Investment Services to its clients for whom it had maintained discretionary mutual fund wrap fee accounts. Specifically, the SEC alleges that in selecting funds for inclusion in its wrap fee accounts that Banc of America Investment Services used a methodology that was contrary to statements of methodology provided to clients and that furthermore, Banc of America Investment Services' affiliate, Banc of America Capital Management earned additional fees as a result of those selections made that were contrary to the stated methodology. As an investment adviser, Banc of America Investment Services had a fiduciary duty to act in the best interests of its clients and was required to disclose all material information concerning potential or actual conflicts of interest.

Section 206(2) and 206(4) of the Investment Advisers Act of 1940 establish a fiduciary duty for investment advisers to act for the benefit of their clients. Section 206 states, in part:
It shall be unlawful for any investment adviser, by use of the mails or any means or instrumentality of interstate commerce, directly or indirectly- … (2) to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client; … (4) to engage in any act, practice, or course of business which is fraudulent, deceptive, or manipulative. The Commission shall, for the purposes of this paragraph (4) by rules and regulations define, and prescribe means reasonably designed to prevent, such acts, practices, and courses of business as are fraudulent, deceptive, or manipulative.

Misrepresentation to clients that funds in the model portfolios would be chosen according to the approved research process and failure to disclose the conflict of interest in its selection of affiliated funds for inclusion in model portfolios were actions found to be in violation of Section 206(2). Making material misrepresentations and omissions in advertising and promotional materials that were distributed to clients and prospective clients was determined to be a violation of Section 206(4).

This enforcement action by the SEC is a reminder of the importance for every investment adviser to fully disclose conflicts of interest and to accurately state all information that is provided in both the Form ADV and in any advertising. RIA Compliance Consultants, Inc. can help you review the adequacy of your current disclosures or provide assistance in preparing disclosure language related to conflicts of interest or other matters. Please contact RIA Compliance Consultants, Inc. if you would like more information about our services.

Labels: Conflict of Interest, Enforcement