Adviser Pays $22 Million for Collecting Payola on Cash Sweep Vehicles

 

A large adviser/broker-dealer consented to $22 Million in disgorgement, penalties, and interest for directing clients to sweep uninvested cash to money market funds that paid revenue sharing back to the adviser.  The two sweep options, offered by an unaffiliated clearing broker, yielded 0.38% even though the clearing broker made available sweep options yielding as much as 0.92%.  Although a customer could choose a higher yielding product, the adviser’s account opening worksheet only listed the lower-yielding, revenue-paying sweep vehicles and offered little instruction or assistance in picking an alternative, higher-yielding money market fund.  Over the course of 4 years, 97% of uninvested client cash went to the offending sweep vehicles.  The SEC also charged the adviser with investing client assets in more expensive fund classes that paid 12b-1 fees and with assessing unnecessary commissions on the purchases of illiquid alts.

Don’t try to be too clever.  When 97% of client assets end up in funds where you receive revenue sharing and that pay a lower yield as a result, all your purported defenses about how clients could select other funds or how disclosure was sufficient fall away.  Nobody’s buying your malarkey.  Certainly not the SEC.