Form ADV Part 2A Item 14.A requires advisers to disclose compensation from non-clients received for providing investment advisory services to clients, as well as resulting conflicts and how the adviser addresses such conflicts. Compensation can include situations where the investment adviser obtains some type of financial incentive for recommending certain investments to a client. These arrangements could potentially impair an investment adviser’s ability to provide impartial advice.
The Asset Management Unit of the SEC has undertaken an enforcement initiative to shed more light on undisclosed compensation arrangements between investment advisers and brokers. For instance, on September 2, 2014, the SEC instituted administrative proceedings against an investment adviser, The Robare Group, Ltd., and its founders.
According to the SEC’s order, Robare Group committed fraud when it failed to disclose to clients that it was party to a compensation agreement with a broker-dealer that entitled Robare Group to a percentage of every dollar its clients invested in certain mutual funds offered by the broker-dealer. The SEC charged that this arrangement was not adequately disclosed to investors. For a number of years, Robare Group completely failed to disclose the arrangement on its ADV. Even though Robare Group eventually revised its ADV to disclose the arrangement, they failed to properly identify the potential conflicts of interest created by the arrangement. Moreover, the SEC took issue with way Robare Group described the arrangement. Robare Group disclosed that it “may” receive compensation from the broker when it was already receiving payments.
This should be an important lesson to investment advisers. Given the SEC’s recent emphasis on the subject, investment advisers should carefully scrutinize the way it discloses economic benefits to clients to make sure the disclosure is accurate and complete.
If you need assistance or have questions about disclosure of economic benefits, the Investment Advisor Rep Syndicate has experience with various investment advisor compliance issues.