Adviser Settles SEC Charges for Failing to Fully Credit Clients for Fees Paid to Affiliated Broker-Dealer

An investment adviser settled SEC charges for failing to fully credit clients for referral fees its affiliated broker-dealer received from third-party fund managers, creating an undisclosed conflict of interest.

According to the order, the firm's client advisory agreements from 2004 until March 2024 and Form ADV Part 2A Brochures from at least 2015 to January 2022 represented that it would offset client advisory fees by any referral fees the firm or its affiliated broker-dealer received from third-party fund managers. The SEC found that between at least 2019 and January 2022, the firm did not apply these offsets consistently for six specific private fund managers.

The SEC found that the referral agreements with the six fund managers paid the affiliated broker a percentage of both management fees and performance fees. While the firm credited clients for the management-fee portion, it failed to credit the performance-fee portion, according to the SEC. The SEC found that during the relevant period, the six fund managers paid the affiliated broker approximately $775,000 (the performance-fee-based portion of referral fees), of which at least $282,921.82 should have been credited to offset client advisory fees. The SEC stated that this practice gave the firm an undisclosed financial incentive to recommend those specific managers.

The firm consented to findings that it violated Advisers Act Section 206(2) ("Prohibited transactions by investment advisers").

The SEC also found that from at least 2019 through March 2024, the firm failed to implement written compliance policies and procedures to ensure fees were calculated correctly and to timely update client agreements to reflect its actual practices. The SEC noted that the firm did not correct its disclosures until January 2022, following an SEC examination, and did not execute amended client agreements until March 2024.

The firm consented to findings that it violated Advisers Act Section 206(4) and Advisers Act Rule 206(4)-7 ("Compliance procedures and practices").

The firm agreed to a censure, a cease-and-desist order, disgorgement of $282,921.82 plus interest, and a $125,000 civil penalty. The SEC established a Fair Fund to distribute the recovery to affected clients.