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SEC Fines Adviser in Wrap Fee Program Dispute

SEC Fines Adviser in Wrap Fee Program Dispute

What happened?

On August 26, 2022, Kovack Advisors, Inc. (“KAI”) settled with the U.S. Securities and Exchange Commission (“SEC”) for almost $900,000 following an order by the SEC instituting administrative and cease-and-desist proceedings against KAI.

KAI offered wrap fee programs to its clients from at least 2015 through 2018, at which point KAI ceased to offer wrap fee programs. A wrap fee program offers “advisory clients several investment management services, including trade execution services, in return for one asset-based fee.” The SEC found that KAI failed to review the wrap accounts for inactivity (violating Section 206(2) of the Advisers Act), failed to adopt disclosures regarding the wrap fee program, and failed to complete required annual compliance reviews (violating Section 206(4) of the Advisors Act and Rule 206(4)-7). Under the settlement, KAI is required to pay a $700,000 penalty, $166,239 in disgorgement and $33,274 in prejudgment interest.

What does this mean for me and my firm?

Firms should review their advisory accounts for inactivity. Advisers should ensure they are providing continuous and ongoing investment advisory services where required by the client’s investment management agreement. Firms should also ensure that any wrap fees are accurately and adequately disclosed on Form ADV.

Fairview® provides full-service compliance support for registered investment advisers by creating and implementing comprehensive, sustainable compliance programs, including ongoing testing and evaluations to ensure firms are remaining compliant with SEC regulations. We make sure that internal controls are built into your operations processes, making compliance features inherent to the culture of your firm. Contact us  today for additional information about maintaining your compliance program.