Under the new leadership of Acting Chair Mark Uyeda, the U.S. Securities and Exchange Commission (“SEC”) recently issued and settled a cease-and-desist order that serves as a stark reminder: an investment adviser’s fiduciary duty to act in client’s best interests remains the bedrock for an investment adviser.
While the order does not necessarily signal a change in the SEC’s enforcement approach, it underscores the fact that fundamental obligations – providing full disclosure of any conflicts of interest and only giving investment advice in the best interest of the client —still matter as much as ever, irrespective of who is at the helm.
Key Facts (According to the SEC)
Change of Account Type: From approximately June 2020 through October 2023, an investment adviser firm and one of its representatives allegedly failed to provide adequate fee disclosures when converting certain clients from brokerage accounts to investment advisory accounts.
Changed Fee Structure: The SEC asserted that these newly converted advisory accounts were charged fees based on a percentage of assets under management, rather than brokerage commissions. Given that many of the converted accounts had relatively minimal trading activity, the shift purportedly led to higher overall costs for clients.
Client Impact: According to the SEC, the clients allegedly did not receive additional services or benefits commensurate with this increase in costs. The Commission further stated that the adviser placed its own financial interests ahead of its clients by recommending the conversion.
Account Reviews: The SEC alleged that the investment adviser firm did not properly review the clients’ investment profiles or evaluate whether an advisory account was truly in their best interests.
Compliance Deficiencies: The investment adviser firm allegedly failed to provide Form ADV disclosure documents in a timely manner to many of the clients with converted accounts. The SEC also asserted that the investment adviser firm lacked the necessary controls and oversight, contributing to the alleged compliance violations.
Alleged Violations & Required Remedies
Violation of Advisers Act: The SEC stated that the investment adviser firm violated Sections 204, 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rules 206(4)-7 and 204-3.
Cease-and-Desist & Monetary Penalties: The investment adviser firm must cease and desist from further violations of federal securities laws and pay a civil penalty of $150,000.
Independent Compliance Consultant: The investment adviser firm is required to retain an independent compliance consultant to evaluate its existing policies, procedures, and disclosures, and recommend enhancements to prevent future violations.
Representative’s Penalty: The investment adviser representative involved is suspended for 9 months and must pay a separate $75,000 penalty, underscoring the SEC’s commitment to holding both the firm and individual accountable for fiduciary breaches.
Client Notification: Additionally, the investment adviser firm must send a copy of the SEC’s order to all current and former clients, ensuring full transparency about the nature and resolution of the enforcement action.
Why This Matters
Some industry observers have speculated whether a leadership change at the SEC might alter the Commission’s enforcement priorities. However, this order highlights the SEC’s continued focus on protecting retail investors and ensuring investment advisers uphold their fiduciary responsibilities. The message is clear: Acting in a client’s best interest is not optional. Under the SEC’s current leadership, advisers can expect rigorous scrutiny of disclosures, fee structures, and account type determinations.
Action Steps
Investment adviser firms looking to shore up their compliance programs should use this enforcement action as a roadmap for proactively identifying and fixing potential deficiencies. The following are few best practices that an investment adviser should consider.
Revisit Fee Structures: Examine whether advisory fees are aligned with the level of investment management and other services provided.
Enhance Disclosures: Ensure that all material facts, especially those concerning compensation, conflicts of interest, and fee arrangements, are clearly and timely disclosed to clients.
Conduct Account Type Reviews: To the extent that the investment adviser firm is dually registered as a broker-dealer or has investment adviser representatives licensed as registered representatives, perform ongoing assessments of account types, client profiles, and trading patterns to confirm that each client is served by the most appropriate account structure.
Strengthen Compliance Programs: Develop and regularly update written policies and procedures that specifically address fee arrangement disclosures, account type reviews, and timely delivery of Form ADV.
By placing the client’s interest at the forefront—through transparent cost structures, thorough evaluations of client needs, and robust disclosure practices – investment advisers can meet their fiduciary obligations and reduce the risk of future regulatory scrutiny.
Resources
WSP/CoE Section Update – Account Type Suitability (Commission vs. Fee)
Included with Annual Compliance Packages (Bronze, Silver, Gold, Platinum & Titanium) in our KnowledgeBase
Available on a la carte basis in our online store at https://www.ria-compliance-consultants.com/product/wsp-coe-section-update-account-type-suitability-commission-vs-fee/
Suitability – Broker-Dealer (Commission) v. RIA (Fee) Account – Client Acknowledgement
Included with Annual Compliance Packages (Bronze, Silver, Gold, Platinum & Titanium) in our KnowledgeBase
Available on a la carte basis in our online store at https://www.ria-compliance-consultants.com/product/suitability-broker-dealer-commission-v-ria-fee-account-client-acknowledgement/
Disclaimer
The information contained in this blog post is general in nature intended for educational purposes only and is not a comprehensive analysis of this topic. This is merely a summary and does not necessarily include all material facts from the proceeding or order. RIA Compliance Consultants, Inc. has not verified the accuracy of the regulator’s press release or order and is not offering any opinion whether the allegations made by the securities regulator are accurate. This post is not intended to constitute compliance consulting advice or apply to any particular investment adviser firm’s specific situation. Please consult the applicable securities regulator’s order, rules, and published guidance for more details about the topics referenced above. For more information about the limitations of this blog post and information on our website, please see our Disclosures webpage.
