The SEC has once again brought action against a firm for failure to properly disclose existing conflicts of interest. According to the SEC’s Order, the firm entered into an ‘undisclosed’ arrangement with an unaffiliated broker-dealer to provide trade execution for the adviser’s clients at a commission rate of $0.01 per share. However, under their existing arrangement, the broker-dealer charged the adviser’s clients between $0.04 and $0.06 per share, and then paid the amount exceeding $0.01 per share commission to the adviser’s affiliated broker-dealer as a “referral fee.” In that way, the affiliated broker-dealer and the adviser were actually paid between $0.03 and $0.05 per share on the adviser’s client.
The adviser’s ADV Part 2A disclosed that its affiliated broker-dealer “may” receive referral fees when obviously it was receiving them. All advisers should review their disclosures on at least an annual basis to make sure they accurately reflect what is occurring as opposed to what might occur in the future.
Please click here to read the full Order.