In the most recent quarterly Ohio Securities Bulletin, the Ohio Division of Securities, which is the regulator of state registered investment advisers in Ohio, noted a recent position taken by its sister division, the Ohio Division of Financial Institutions, which regulates banks and mortgage brokers, since it may have implications to registered investment advisers registered affiliated with banks or mortgage brokers in Ohio.

The following is an excerpt directly from the Ohio Securities Bulletin:

The [Ohio] Division of Financial Institutions stated a position in its Mortgage Brokers and Lenders Letter No. 2006-2 that could potentially affect investment advisers. The Division cited the prohibition against mortgage brokers or loan officers “obtaining a referral fee from a party with a related interest in the transaction” found in R.C. section 1322.071(B)(3). The Letter notes that a “person acting as an investment adviser urging the refinancing or purchase of property who also acts as the loan officer in the same transaction effectively is obtaining fees through a self-referral.”

The Letter added that “the notion of borrowing one’s home equity to invest in the market is a risky strategy, which should not be undertaken where there is a significant conflict of interest arising from considerations of the mortgage broker or loan officer’s own profit or remuneration when counseling such an investment strategy.” The Division concluded that acting as both an investment adviser and a loan officer in the same transaction is an “improper and dishonest practice” which violates R.C. 1322.07(C) and recommended that registrants and licensees review their policies regarding the matter.

Both state and SEC registered investment adviser firms with affiliated banks or mortgage brokers in Ohio or investment adviser representatives acting as loan officers or mortgage brokers in Ohio need to review their business practices and supervisory policies and procedures in light of this letter.