CCO Barred and Fined for Misleading ADV Disclosure
The SEC imposed a one-year industry bar against the Chief Compliance Officer of a registered investment adviser for filing Form ADVs that failed to adequately disclose commission sharing arrangements. The CCO and two other firm principals also agreed to pay over $1.1 Million to settle the charges. The SEC alleges that the respondents failed to adequately disclose a commission sharing arrangement whereby an affiliated broker-dealer would receive all commissions in excess of the $.01/share paid to an unaffiliated executing broker. Although the ADV disclosed that an affiliated broker may receive referral fees, the SEC asserts that the disclosure “failed to convey completely and accurately the nature and existence of the conflict of interest” including that the firm currently received revenue sharing, not that it “may.” The SEC targeted the CCO as the person primarily responsible for preparing and filing the Form ADV.
OUR TAKE: The Form ADV carries securities law liability. Because the SEC heavily scrutinizes the disclosure during exams, we recommend that firms hire securities law counsel to review disclosure in much the same way that they use lawyers to review prospectuses. Also, CCOs may want to consider bringing the General Counsel into the Form ADV preparation and filing process.