The Securities & Exchange Commission (“SEC” or the “Commission”) instituted cease and desist proceedings against Financial Fiduciaries, LLC, (“Financial Fiduciaries”) a registered investment adviser located in Wausau, Wisconsin, and Thomas Batterman, the principal of the adviser. The SEC alleged that the adviser violated various sections of the Investment Advisers Act of 1940 (“Advisers Act”) by failing to disclose conflicts of interest and the fact that the adviser had custody.
Financial Fiduciaries is an RIA that offers discretionary asset management, financial planning, and tax preparation services. The firm advises over 160 clients and manages over $145 million in assets. The firm is owned by WTC, Inc., a private Wisconsin corporation.
The adviser entered into an agreement with Investors Independent Trust Company (“IITC”), a trust company and private wealth management firm. Pursuant to the agreement executed by the parties, IITC was to act as the custodian for the trust assets of Financial Fiduciaries’ clients who utilized IITC as trustee; IITC would maintain a trust services office in WTC’s and Financial Fiduciaries’ Wausau offices; Financial Fiduciaries would be the exclusive provider of investment advisory services for all IITC’s clients requiring such services; one WTC employee located in Wisconsin would serve as a “dual employee” of IITC and WTC; IITC would pay WTC $2,000 per month as part of the dual employee’s compensation; and IITC would pay WTC variable monthly rent for providing office space and other office support for the IITC Wisconsin office equal to 50% of the total monthly trust administrative, custody, and base account fees (after reduction for expenses) earned by IITC from Financial Fiduciaries clients.
Given the financial arrangements between Financial Fiduciaries and IITC, Financial Fiduciaries had financial incentives to recommend IITC to its clients who required trust services, and ensure those clients used IITC as a trustee. Financial Fiduciaries had custody of client securities and funds because the dual employee had direct access to and control over assets of Financial Fiduciaries’ trust clients by virtue of her also being an employee of IITC. The employee was authorized to act on behalf of IITC, to include opening/closing client accounts, purchasing and selling securities in the accounts, and transferring funds into and out of such accounts. In addition, she had direct check writing authority over an IITC account at a local bank. The dual employee received and deposited checks into the account from trust clients of Financial Fiduciaries, and wrote checks out of the account to trust beneficiaries.
The adviser breached its fiduciary duty to clients when it did not disclose in its Forms ADV, or through other means to clients, the material conflicts of interest that existed as a result of the fee and employment arrangements between Financial Fiduciaries and IITC. Due to these violations, the SEC assessed civil money penalties totaling $60,000 against the adviser and its principal, Batterman. Please click here to read the complete action.
Advisers should remember that conflicts of interest and a determination as to whether the adviser has custody, should be disclosed on the adviser’s ADVs. Contact us with questions regarding conflicts of interest and the Custody Rule. We can assist you with determining when a conflict of interest or custody exists, and make necessary updates to your ADVs, if required.
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.