Adviser Failed to Disclose Reasons for Recommending BD
The SEC has commenced an enforcement action against a registered investment adviser that failed to disclose the financial benefits received from the broker-dealer that it recommended to clients. Although clients ultimately chose the broker-dealer, the adviser generally worked only through one BD with which it had a close relationship. The SEC charges that the principal’s wife, a registered representative of the BD, received 50% of all mark-ups, which were determined by the adviser through a principal trading account structure. Also, the SEC says the BD provided firm infrastructure services and other benefits to the adviser. The SEC charges that the firm’s Form ADV Item 12 disclosure did not fully describe the benefits received from the BD.
OUR TAKE: Many advisory firms recommend the use of a particular broker-dealer even if the client may choose a different firm. Advisers must ensure that they fully disclose the reasons for recommending such BD so that all conflicts are fully disclosed.