SEC Issues Cease-and-Desist Action for Failure to Disclose Conflicts of Interest

July 10, 2019

On July 1, 2019 the United States Securities and Exchange Commission (“SEC”) filed an order instituting administrative cease-and-desist proceedings to an investment adviser firm for allegedly failing to disclose material conflicts of interest.

According to the cease-and-desist order by the SEC, the investment adviser firm failed to disclose material conflicts of interest. The SEC alleged that based upon the investment adviser firm’s recommendation, approximately 40 of its investment advisory clients invest in securities issued by an affiliate of the investment adviser firm. The SEC claimed, however, that the investment adviser firm did not disclose to its investment advisory clients investing in its affiliate’s securities that the investment adviser had received a $1.5 million loan and access to a $2 million line of credit from the affiliate/parent company with terms that created an incentive for the investment adviser to recommend the securities of the affiliate.

The SEC ordered that the investment adviser firm pay a $1.3 million fine to the SEC. The full administrative proceeding released by the SEC can be found at https://www.sec.gov/litigation/admin/2019/33-10655.pdf .

All investment advisers have an obligation to fully disclose all material facts to advisory clients including any conflicts of interest. Investment advisers must:

  • Make Full and Truthful Disclosure. All information in brochure and brochure supplements must be true and may not omit any material facts.
  • Disclosure Obligations as a Fiduciary. Under federal and state law, investment advisers are fiduciaries and must make full disclosure to clients of all material facts relating to investment advisory relationships. As a fiduciary, investment advisers must also seek to avoid conflicts of interest with clients, and, at a minimum, make full disclosure of all material conflicts of interest between the investment adviser and its clients that could affect the advisory relationship.

RIA Compliance Consultants has compiled a “Conflicts of Interest Checklist” to assist investment adviser firms in reviewing potential conflicts of interests. This checklist is available to Bronze, Silver, Gold, and Platinum Package clients as part of their package or available a la carte here. Additionally, we will devote a session of our Investment Adviser Compliance Conference to addressing conflicts of interests. See below for more information on our conference.

If your investment adviser firm has questions about conflicts of interest and making disclosures we encourage you to speak with your compliance consultant or if you are not a an existing client of RIA Compliance Consultants click here to set up an introductory call with one of our Senior Compliance Consultants.

Posted by Grant Parr
Labels: Conflict of Interest, Enforcement, Fiduciary, SEC