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Principals Close Shop for Failure to Disclose Investments in Affiliated Mutual Fund

excessive fine for mutual fund

The principals of an investment adviser/fund manager agreed to wind down their firm and pay fines for failing to properly disclose conflicts of interest when they invested clients’ money in an affiliated mutual fund.  The SEC asserts the respondents invested 35% of client assets in an affiliated mutual fund, which resulted in clients paying an asset management fee of 1.3% of assets plus fund fees exceeding 2.95%.  The firm did amend its Form ADV to describe the conflict, but, according to the SEC, the respondents did not deliver the amended Form ADV to clients before investing assets in the affiliated fund.  The SEC also notes that the respondents failed to heed advice of a compliance consultant about Form ADV disclosure and delivery.  The SEC claims the respondents violated Section 206(2) (anti-fraud), Rule 206(4)-7 (compliance rule), and Rule 204-3 (brochure delivery).

OUR TAKE:
The real issue in this case is that the adviser was charging clients over 4.00% in fees and expenses, which may be a breach of fiduciary duty no matter how much disclosure is provided.  The failure to deliver the Form ADV just made the case easier for SEC Enforcement.  Also, you should always listen to your compliance consultant.

https://www.sec.gov/litigation/admin/2016/ia-4537.pdf