On January 14, 2025, three Investment Adviser Representatives (IARs) settled charges brought by the SEC for acting as unregistered brokers. “This case highlights yet another way the StraightPath Funds were marketed and reflects that being associated with a registered investment adviser does not give one license to also act as a broker without complying with broker registration requirements,” said Sheldon L. Pollock in an SEC press release. Pollock is the Associate Regional Director in the New York Regional Office of the SEC.
SEC’s Actions Against IARs Acting as Unregistered Brokers
StraightPath Venture Partners, LLC (StraightPath) offered investments in LLCs. Each of those LLCs purportedly owned shares of private issuers that might become publicly traded. The SEC previously accused StraightPath of engaging in a pre-IPO stock fraud scheme.
The SEC charged the three IARs with soliciting investors for StraightPath. According to the SEC, the three IARs acted as unregistered brokers by selling membership interests in those LLCs that were supposedly invested in shares of pre-IPO companies.
Two of the IARs formed an entity for the purpose of entering into agreements with StraightPath. The IARs were entitled to receive payments in connection with any investors they successfully solicited to invest in the StraightPath Funds (Funds). The SEC discovered that the two IARs operated a sales force of individuals who were not registered as brokers. Furthermore, they recruited a third IAR to assist in these efforts.
The SEC alleged that the three IARs provided investors with marketing materials, advised investors on the supposed merits of the investments, and received transaction-based compensation. Their activities were all indicative of brokerage activity, even though they were not registered as brokers. The compensation the IARs received did not come from pre-existing advisory clients of their Registered Investment Adviser (RIA). The RIA did not charge these investors a management fee based on the value of their investment in the Funds. The payments received by the IARs came solely from StraightPath. Therefore, the payments were transaction-based compensation for brokerage services.
The first IAR successfully solicited, either directly or through other unregistered agents he compensated, at least $6 million in investments for the Funds from at least eighty investors. The IAR received over $145,800 in transaction-based compensation from his unregistered conduct that involved brokering transactions between investors and the Funds.
The second IAR also solicited investors on behalf of the Funds. This IAR successfully solicited, either directly or through other unregistered agents he compensated, at least $6 million in investments for the Funds and received over $142,000 in transaction-based compensation.
The third IAR successfully solicited at least $1.1 million in investments in the Funds from at least nineteen investors and received over $67,000 in transaction-based compensation.
Action Against RIA Warns Against Disclaiming Fiduciary Duty
The three IARs were registered with an RIA based in Staten Island, New York. Two of the IARs held an ownership interest in the RIA.
According to the SEC’s complaint, the RIA improperly managed its conflict of interest when recommending investments in private funds run by an affiliated entity that was under common ownership and control. Principals of the RIA operated the affiliated manager.
Specifically, the RIA required clients to acknowledge that the firm was disclaiming responsibility for recommending investments offered by private funds managed by an affiliated entity. The RIA also asserted that it was not acting as clients’ investment adviser when clients invested in those private funds. These statements contradicted the RIA’s Form ADV disclosure brochure regarding how the firm managed conflicts of interest. Furthermore, these statements might have caused clients to believe incorrectly that they had waived a nonwaivable cause of action against the RIA.
The RIA disclosed that it had a financial conflict of interest when recommending investments offered by private funds managed by an affiliated entity. To address the conflict of interest, the RIA stated that it would reasonably ensure that all clients’ accounts were invested in accordance with their approved investment policy statements. The RIA also disclosed that it would adopt policies and procedures to reasonably ensure that investments and recommendations were in the best interest of clients.
Instead of adhering to those policies and procedures, however, the RIA required clients who invested in the funds managed by the affiliated entity to acknowledge that the firm was disclaiming its role in their investment decision. The letter that the RIA instructed clients to sign was also improper, because it required them to agree to a waiver of the firm’s fiduciary duty. Clients might incorrectly believe they had waived a nonwaivable cause of action against the RIA that was permitted under state or federal law.
According to Pollock, the case brought against the RIA is an important reminder that investment advisers must carefully evaluate their use of liability disclaimer language. The fiduciary duties owed by the RIA could not be disclaimed under these circumstances, particularly when clients were onboarded for the purpose of making that specific investment.
Takeaways
The SEC concluded that each IAR violated Section 15(a) of the Exchange Act. Although the IARs did not admit or deny the SEC’s findings, they agreed to pay a combined amount of almost $540,000 in disgorgement, prejudgment interest, and civil penalties. The IARs also agreed to industry and penny stock suspensions.
In the enforcement action against the advisory firm, the SEC determined that the RIA violated Section 206(2) of the Investment Advisers Act. Without admitting or denying the SEC’s findings, the RIA agreed to be censured and to pay a civil penalty of $100,000.
The cases can be accessed at SEC.gov | Three Investment Adviser Representatives Settle SEC Charges for Acting as Unregistered Brokers.
Recent Comments