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Large Adviser Penalized $3 Million over Revenue Sharing

A large investment adviser agreed to pay over $3 Million in disgorgement, fines and interest for failing to disclose mutual fund revenue sharing received from its clearing broker.  The SEC alleges that, during the last 10 years, the clearing broker paid the adviser a portion of trailer fees received from mutual funds to which the adviser directed client assets.  The SEC also described an arrangement whereby the clearing broker paid the adviser for certain shareholder services.  The SEC faults the adviser for failing to disclose in either the ADV or its client agreements that it received payments and that such payments created a conflict of interest.  The adviser and clearing broker have since altered their agreement so that the revenue sharing is calculated based on total assets rather than the funds in which the adviser invests client assets.

OUR TAKE: The SEC does not allege that this conflict actually harmed any client, or that the revenue sharing had any empirical effect on the adviser’s investment decisions.  Also, the SEC seems to be ok with revenue sharing that does not present a potential conflict of interest i.e. based on total assets.  It is also less than clear whether disclosure would have actually cured the SEC’s conflict of interest concerns.


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