$489k SEC Enforcement Action | Advisory Fee Practices Lessons
SEC Releases
Introduction
The SEC recently announced a settled enforcement action against a $357 Million AUM RIA (Wealth Manager with a separately registered Broker/Dealer) for charging advisory fees that were inconsistent with its advisory agreements and Form ADV disclosures.
The SEC also found that the Adviser did not adequately disclose certain conflicts of interest related to affiliated compensation and failed to implement its written compliance policies and procedures governing fee calculations and related disclosures.
Following an SEC Examination, the Adviser revised its Form ADV and later amended its advisory agreements.
Key Takeaways
- Implement Written Compliance Policies.
- The SEC found the Adviser failed to implement its written compliance policies and procedures governing fee calculations and related disclosures.
- Disclose Material Conflicts of Interest.
- The SEC found the Adviser did not adequately disclose conflicts related to referral compensation received by its affiliated Broker/Dealer.
- Follow Advisory Agreements.
- The SEC found the Adviser charged advisory fees that were inconsistent with its advisory agreements by failing to provide certain required fee offsets.
- Ensure Form ADV Matches Actual Practices.
- The SEC found the Adviser’s Form ADV disclosures regarding fee offsets were inconsistent with how advisory fees were actually calculated.
- Corrective Action Does Not Eliminate Prior Violations.
- Following an SEC Examination, the Adviser updated its Form ADV and amended its advisory agreements, but the SEC still brought an enforcement action based on the prior conduct.
- The SEC Imposed Sanctions to the Adviser.
- Without admitting or denying the findings, the Adviser agreed to a cease-and-desist order, a censure, disgorgement of $282,921.82, prejudgment interest of $81,037.23, a $125,000 civil monetary penalty, and the establishment of a Fair Fund.
Vigilant’s Conclusion
This enforcement action highlights the importance of ensuring that advisory agreements, Form ADV disclosures, and actual operational practices remain fully aligned.
Advisers should periodically review fee calculation methodologies, referral and placement compensation arrangements, disclosure documents, and written compliance policies to confirm they accurately reflect current business practices.
Just as importantly, Firms should verify that compliance procedures are being implemented in practice, not simply documented on paper.
Regular testing of fee calculations, conflict disclosures, and contractual consistency can help identify discrepancies before they become regulatory issues.