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Securities Compliance Sentinel Analysis of cutting-edge securities industry issues

RIAs Really Need to Be Careful When Using an Affiliated BD

Posted in Broker-Dealer Regulation, Compliance and Supervision, Investment Adviser Regulation, SEC Compliance, SEC Enforcement

Recently, a registered investment adviser and its principal had to pay approximately $500,000 in disgorgement and penalties when they used an affiliated broker-dealer to charge clients higher commission rates.  See http://www.sec.gov/litigation/admin/2012/34-68118.pdf

The SEC found that the RIA and its principal, essentially, mislead their advisory clients by representing the clients were receiving a discount on commissions when the trades were placed through the affiliated BD.  In fact, the SEC stated these advisory clients paid higher rates than the BD charged the RIA, and the RIA and principal pocketed the difference.  The RIA did, however, disclose the potential conflict of interest in its Form ADV, but omitted any discussion on the compensation.  For good measure, the SEC also found the RIA failed to have any best execution review despite such a description contained in the Form ADV.

This enforcement action clearly portrays a more activist SEC on these issues so RIAs and their principals really need to be prepared by ensuring their Form ADVs are accuarate and disclose all conflict of interest information including fees and commissions.  Most likely, this will also be a particular concern during SEC RIA and BD exams, yet another potential hot point.