Submitted by: Joshua Kelly, Compliance Consultant, Red Oak Compliance Solutions
On December 12th, the SEC imposed remedial sanctions and issued a cease and desist order against Wisconsin-based investment adviser and broker-dealer Landaas & Company (L&C) and their Chairman and sole owner, Robert Landaas. Between 1999 and March 2017, L&C had received compensation from an unaffiliated clearing broker which they failed to disclose to their advisory clients in their Form ADV Part 2A brochure. L&C charged a $20 mark-up to pay their clearing broker’s clearing and execution charges; however they sometimes kept the remainder of the of the mark-up for itself as compensation for acting as the introducing broker. In some cases, even L&C representatives themselves failed to understand the nature of these charges and said that the firm did not receive any portion of the confirmation fee.
Even if this fee arrangement was disclosed to clients, this fee arrangement was determined to be a breach of L&C’s fiduciary duty to seek the best execution for their advisory clients. However, L&C did not stop there. In addition to the confirmation fees, the clearing broker shared revenues from the clearing broker’s no-transaction-fee mutual fund program with L&C, which created an incentive to use this program. This additional source of income was never disclosed to their clients and they failed to disclose the conflict of interest created by this arrangement.
As a result, the SEC found that L&C violated Section 206(2) and 206(4) of the Advisers Act. L&C failed to “adopt and implement written policies and procedures reasonably designed to prevent” “any act, practice, or course of business which is fraudulent, deceptive, or manipulative.” In addition, they willfully violated Section 207 of the Advisers Act by “omit[ting] to state…material fact[s]” in registration applications and reports filed with the SEC.
L&C was ordered to retain an independent compliance consultant, who would submit a written and detailed report of their findings to L&C and the SEC. L&C was ordered to adopt all recommendations contained in each report within 60 days.
In addition to hiring the consultant, L&C was ordered to pay disgorgement of $408,483.06, with prejudgment interest of $60,485.14 and a $130,000.00 civil penalty, for a total of $598,941.20.
Click here to read the complete order.
What is your takeaway from this story?
As a Registered Investment Adviser, you should make sure that:
- Form ADV Part 2A, Item 5 of your brochure discloses all brokerage and other transaction costs.
- Form ADV Part 2A, Item 12.A of your brochure describes any factors that you consider in recommending a broker-dealer for client transactions, and that you define any economic relationship with the broker-dealer that creates a potential conflict of interest.
- Your representatives understand the disclosures on your ADV so that they can accurately describe them to clients when the need arises.
- Always fulfill your obligation to provide the best execution to your clients. Make sure you maintain and adhere to policies and procedures designed to evaluate the factors you consider when choosing broker and evaluation best execution.
If you have any question or concerns about how to accomplish this, the consultants at Red Oak are ready and willing to help…without the $600,000 fine from the SEC! We help broker-dealers, advisors, investment firms, and hedge funds meet regulatory requirements, improve their compliance programs and increase ROI. We provide customized services to get your firm up and running, on-going compliance assistance, workflow software solutions and much more to keep your compliance program on track.
For more information about Red Oak Compliance software and services solutions, partnership and/or integration opportunities or to schedule a demonstration, please visit us online, email us email@example.com or give us a call at 888-302-4594.
About Red Oak Compliance Solutions
Red Oak Compliance Solutions is the global advertising review software of choice in the financial services industry. It is a comprehensive suite of SEC 17A-4 compliant features that are 100% books and records compliant and provides clients with 35% faster approvals and 70% fewer touches or better. We also offer Smart Review(SM), which solves for the storage and maintenance of disclosures, helping firms reduce risk, decrease review times, and increase the speed of distribution of marketing materials. Smart Registration(SM) automates the licensing and registration management process to help reduce regulatory risk and time spent on manual processes. Overall, Red Oak allows firms to minimize risk, reduce costs, and increase compliance review process effectiveness and efficiencies.