The Securities and Exchange Commission today charged an investment advisory firm located outside Tacoma, Wash., with engaging in hundreds of principal transactions through its affiliated broker-dealer without informing clients or obtaining their consent.
Strategic Capital Group LLC, which is additionally charged with distributing false and misleading advertisements to investors, agreed to pay nearly $600,000 to settle the SEC’s charges. The firm’s CEO N. Gary Price was charged with causing some of the firm’s violations, and agreed to pay a $50,000 penalty to settle the charges against him.
In a principal transaction, a firm acting for its own account or through an affiliated broker-dealer buys a security from a client account or sells a security to it. Principal transactions can pose potential conflicts between the interests of the adviser and the client, and therefore advisers are required to disclose in writing any financial interest or conflicted role when advising a client on the other side of the trade. They also must obtain the client’s consent.
An SEC investigation found that Strategic Capital engaged in more than 1,100 principal transactions through its brokerage affiliate RP Capital LLC without making the required disclosures to clients or obtaining consent beforehand. Strategic Capital also failed to seek best execution for the transactions it executed through RP Capital. Price signed regulatory filings falsely stating that the firm did not engage in principal transactions.
The SEC investigation also found that Strategic Capital provided prospective investors with a pair of false and misleading advertisements. One advertisement failed to disclose that the portrayed results were partially based on returns of an index rather than actual, historical returns achieved by Strategic Capital’s recommendations. The second advertisement did not disclose that the portrayed results did not deduct fees and thus materially overstated Strategic Capital’s investment performance.
“Investment advisers must be fully forthcoming about how they execute client trades and portray past performance,” said Marshall S. Sprung, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. “Strategic Capital clients were not provided all of the information they needed to evaluate the firm’s potential conflicts of interest and investment management skills.”
According to the SEC’s order instituting a settled administrative proceeding, Strategic Capital also failed to implement proper compliance procedures at the firm.
The SEC’s order finds that Strategic Capital, based in Gig Harbor, Wash., violated the Investment Advisers Act of 1940, specifically the antifraud, principal transactions, advertising, compliance, and reporting provisions. The order finds that Price caused Strategic Capital’s violations of the compliance and reporting provisions. Strategic Capital’s disgorgement amount of $368,459 will be distributed to current and former clients, and the firm also must pay prejudgment interest of $17,831 and a penalty of $200,000. Without admitting or denying the findings in the order, Strategic Capital and Price agreed to cease and desist from committing or causing future violations of these provisions.
The SEC’s investigation was conducted by Jeremy E. Pendrey and Erin E. Schneider, who work in the Asset Management Unit in the San Francisco Regional Office. The SEC examination that led to the investigation was conducted by Tracey Bonner, James Marchi, and Alice Schulman of the San Francisco office’s investment adviser/investment company examination program.