The Securities and Exchange Commission (“SEC”) has charged a Houston-based advisory firm with fraud for failing to disclose conflicts of interest to investors. Robare Group Ltd. (“Robare”) had a compensation arrangement in place with the un-named brokerage firm who was offering the mutual funds. The arrangement allowed Robare to receive a percentage of every dollar received for recommending the mutual fund to clients. Over eight (8) years Robare received almost $440,000 from the broker.
While Robare did disclose the compensation agreement in its revised Form ADV in December 2011 and in later disclosures, it wrongly stated that the firm did not receive any compensation from the arrangement. Further, the disclosures proved to be inadequate because they stated that Robare “may receive compensation from the broker when in fact the firm was definitively receiving payments.” According to Marshall S. Sprung, co-chief of the SEC Enforcement Division’s Asset Management Unit “By failing to fully disclose its agreements with the brokerage firm, Robare Group deprived its clients of important information they were entitled to receive.”
The SEC’s Enforcement Division Asset Management Unit has focused its attention on cases of undisclosed compensation arrangements between advisers and brokers. In another case, the SEC charged an adviser in Oregon with failing to disclose revenue sharing payments and other conflicts to clients. The SEC also is reviewing whether conflicts of interests played a role in JPMorgan Chase & Co. selling certain investments to specific clients.
It is important to take the appropriate steps to eliminate, mitigate and disclose conflicts of interest at your firm. Frequently check to ensure that material, meaningful disclosures are provided to clients, perform detailed analysis of compensation arrangements and proactively identify and mitigate conflicts of interest once they are detected.
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