Pair of Advisers Fined for Failing to Disclose Interest in Publicly Traded Company

 

WHAT HAPPENED?

On Sept. 24, 2019, the Securities and Exchange Commission released information that a registered investment adviser, Strategic Planning Group, and its principals, David Rourke and Jarrod Sherman, were charged for failing to disclose conflicts of interest to clients and on Form ADV.

The trouble started in 2013, when Rourke and Sherman began acting as consultants to Ecoark, an agricultural technology company. The pair worked closely with Ecoark for three years, each being paid 50,000 shares in the company as compensation.

SPG manages over $214 million for approximately 300 clients and invests nearly entirely in mutual funds and ETFs. However, the firm had interest in a single publicly-traded stock: Ecoark. Clients of SPG collectively own nearly 9% of Ecoark through the firm’s investment in the company. Purchasing of the shares on behalf of clients was, presumably, done to further Rourke and Sherman’s own interest in Ecoark.

Despite the obvious favoritism toward the technology group, clients were never made aware of Rourke and Sherman’s interest in the company. To make matters worse, several Forms ADV were filed with evasive statements about the firm’s purchasing of publicly-traded stocks. Furthermore, Sherman, SPG’s Chief Compliance Officer, secured an outside compliance consultant to work with the firm in 2014. Sherman failed to provide the consultant with requested documents regarding SPG’s involvement in any joint ventures, including the connection to Ecoark.

The Commission found the actions of Rourke and Sherman to be in violation of anti-fraud provisions of the Advisers Act. As a result, the Commission has ordered Rourke, Sherman, and SPG to cease and desist from continuing to violate Section 206(2) the Advisers Act and to pay penalties totaling $350,000.

WHAT DOES THIS MEAN FOR ME?

SPG could potentially have avoided action from the Commission by fully disclosing to clients, its hired compliance consultant, and on its Forms ADV the terms of the affiliation with Ecoark and then altering its involvement with the company if necessary. Alternatively, the group could have avoided trouble by abstaining from investing client accounts in the stock altogether.

If your firm has entered into any joint ventures, the engagement is a potential conflict of interest. It is essential to properly report the relationship to avoid action by the Commission and to always operate as a fiduciary to clients.

Fairview works diligently to help registered investment advisers maintain compliance with Commission regulations and minimize potential conflicts of interest. Contact us for more information about reporting requirements and management of joint ventures.

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