Adviser Should Have Recommended No-Load Funds
A registered investment adviser and its principal agreed to pay $450,000 in disgorgement, penalties and interest and consented to an industry bar for purchasing load funds rather than less expensive no-load funds. The SEC charges that the principal, a registered representative of the BD that sponsored the UITs that the adviser recommended, advised clients to purchase the load product rather than a nearly identical no-load product, because he received substantial commission compensation in addition to the advisory fee. The SEC alleges that the respondent did not disclose the availability of the no-load funds and that he received compensation on the load funds. The SEC also criticized the respondent for failing to change its disclosure or practices after the staff raised the issues in an exam deficiency letter.
OUR TAKE: Advisers with a broker-dealer affiliation must ensure full disclosure of any commission compensation to advisory clients with whom they maintain a fiduciary relationship (or avoid receiving such compensation altogether). This case also shows the perils of ignoring SEC exam deficiencies. Rather than changing disclosure, the firm will pay a big fine and the principal is banned from the industry.