Adviser Ignored House Accounts
An adviser and its two principals agreed to pay nearly $1 Million in disgorgement, fines and penalties for failing to manage house accounts after assigned investment adviser representatives left the firm.
The adviser claimed to perform regular account monitoring and suitability for all client accounts. However, the SEC alleges, once assigned IARs left the firm and the clients became house accounts, the firm often failed to perform any services, even though it charged account level fees that were shared with the firm’s principals that were the designated IARs for all house accounts. The SEC also accuses the firm of failing to notify clients when their IARs departed even after adopting procedures requiring such notification. The SEC also asserts that the respondents directed clients to an affiliated portfolio manager without disclosing the conflict of interest that arose because of joint ownership and fee sharing. The SEC faults the firm for a weak compliance program and barred the dual-hatted principal that served as Chief Compliance Officer from serving as a CCO for any investment adviser.
One major difference between advisers and brokers is that advisers have an ongoing fiduciary duty to manage, monitor, and advise accounts whereas brokers only have a suitability obligation at the point of the transaction (subject to the Best Interest standard). Advisers cannot “set it and forget it” while taking fees. This ongoing monitoring obligation has caused the SEC to question robos and wrap programs that try to limit customization.
Read SEC Order here.