Poor Recordkeeping Results in Adviser Termination and Industry Ban
An adviser’s registration was terminated and its principal barred from the industry for poor recordkeeping and resulting charges that it falsely claimed registration eligibility, failed to update and deliver the Form ADV, and overcharged clients. The SEC alleges that the adviser claimed to have $39 million in assets under management, when it actually had $9 Million, in order to continue as an SEC-registered adviser. However, the adviser could not substantiate its AUM claims because it did not maintain any financial records. The adviser also failed to prepare and deliver a Form ADV Part 2 to clients or execute investment management agreements. As a consequence, the adviser could not justify charging the assessed fees, which the SEC alleges were higher than oral representations made to clients.
OUR TAKE: Firms must keep adequate records to back up any AUM claims and justify fee charges. Although the Advisers Act does not require agreements with clients, advisers without such contracts risk both regulatory actions and civil suits.