SEC Issues Cease-and-Desist Order for Incomplete Disclosure of a Conflict of Interest

September 22, 2007

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Once again the U.S. Securities and Exchange Commission (“SEC”) issued a cease-and-desist order against a registered investment adviser for incomplete disclosure of a conflict of interest in violation of Section 207 of the Investment Advisers Act of 1940.

In the Matter of Callen Associates (Rel. IA-2650/Sept. 19, 2007; File No. 3-12808), the SEC alleges that a pension consultant registered as an investment adviser sold its affiliated a broker-dealer, and as part of this sale, the purchaser agreed to pay an annual fee for eight years to the investment adviser for sale of the affiliated broker-dealer contingent upon the investment adviser’s clients continuing to generate a minimum amount of commissions each year with the purchaser’s broker-dealer. The SEC asserts that although the investment adviser disclosed through its Form ADV Part II that the purchaser’s broker-dealer was its preferred/exclusive broker for plan sponsor/investment manager clients, the investment adviser described the ongoing compensation from the sold broker-dealer to the investment adviser as a periodic fixed fee. The SEC found that the characterization of these payments to the investment adviser “… as ‘fixed’ was misleading in that a material portion of each annual payment was contingent upon the [purchased broker-dealer’s] receipt of a minimum threshold of [the investment adviser’s] client brokerage business.”

This enforcement action by the SEC is an excellent example of the need for an investment adviser to describe accurately and thoroughly any potential conflicts of interest to its clients and the SEC. If your investment adviser needs assistance in preparing such disclosures, please contact RIA Compliance Consultants, Inc. for more information about our services.

Posted by Bryan Hill
Labels: Conflict of Interest, Enforcement, Form ADV