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Dual Registrant Fails to Disclose Conflict of Interest from Revenue Sharing

Dual Registrant Fails to Disclose Conflict of Interest from Revenue Sharing


On July 19, 2017, the SEC charged a dually-registered investment adviser and broker dealer (“Respondent”) for failing to disclose compensation received from a third-party broker-dealer (“Broker”). Starting in 2002, Respondent waived transaction fees it and Broker would otherwise charge for purchases of mutual funds offered by Broker. In return, Broker gave a percentage of revenues it received from these transactions to Respondent. Respondent also paid reduced clearance and execution costs to Broker for its clients utilizing Broker’s services. Respondent did not pass on these reduced costs to clients, which therefore created additional revenue for Respondent.WHAT WERE THE IMPLICATIONS?Although Respondent disclosed its relationship with Broker in its filings to the SEC, advisory clients were never informed of the conflict of interest created by this revenue sharing. Respondent also failed to meet its obligation to seek best execution.

Respondent’s conduct was in violation of Section 206(2), 206(4) and 207 of the Advisers Act due to its engagement in fraudulent transactions, inadequate written policies and procedures and untrue statements made in its filing with the SEC. Accordingly, the SEC has fined and censured Respondent.


The SEC’s charges highlight the importance of investment advisers disclosing all material facts concerning their business practices. Firms should ensure that their written policies and procedures address providing accurate disclosures that are updated when necessary. Please contact Fairview® with any questions or concerns you might have regarding this case and how it relates to your firm.