On March 19, 2025, the SEC obtained final judgment against a Registered Investment Adviser (RIA) that allegedly breached its fiduciary duty when making recommendations regarding wrap accounts. The firm also failed to disclose material conflicts of interest. The RIA agreed to the final judgment without admitting or denying the allegations made by the SEC.
Fiduciary duty means looking out for the best interest of the client.
The case against the RIA, which is based in Fairfield, Iowa, was originally filed on March 1, 2022. The SEC accused the RIA of breaching its duty of care when making recommendations to place clients in wrap accounts instead of traditional advisory accounts. The SEC’s complaint alleged that the RIA repeatedly violated its fiduciary duty by converting certain traditional accounts to wrap accounts without providing full and fair disclosure to clients.
According to the SEC, the RIA provided false and misleading information to clients regarding why these conversions were necessary. The RIA also failed to disclose that it received financial incentives for converting clients from traditional accounts to wrap accounts. As a result of these conversions to wrap accounts, the RIA collected higher advisory fees. The RIA converted hundreds of accounts to its more expensive wrap fee program.
In addition, the RIA violated its fiduciary duty by failing to determine whether conversions were in clients’ best interest. The firm failed to satisfy its fiduciary obligation to analyze whether these conversions were in its clients’ best interests.
The RIA routinely put its own interests ahead of the firm’s advisory clients. The RIA invested clients’ assets in certain mutual funds and money market sweep funds that generated millions of dollars in revenue sharing payments to the firm’s affiliated brokerage firm. The RIA recommended these securities to clients, not the lower-cost share classes and investment options that produced little or no revenue sharing.
The RIA’s disclosures were weak in other areas. The RIA failed to disclose the conflicts of interest pertaining to their Investment Adviser Representatives (IARs) who received forgivable loans in exchange for maintaining certain asset levels and tenure with the firm. Those forgivable loans created a financial incentive for the IARs to maintain their relationship with the RIA and improperly influenced their recommendations to clients.
Sanctions imposed on the RIA
The RIA was permanently enjoined from violating Sections 206(2) and 206(4) of the Investment Advisers Act of 1940, as well as Rule 206(4)-7 thereunder. The judgment ordered the RIA to pay $15 million in monetary damages. Specifically, the RIA agreed to pay $10,164,698 in disgorgement and $3,035,302 in prejudgment interest, as well as a $1,800,000 civil penalty.
The final judgment ordered the RIA to stop providing investment advice to clients without adopting and implementing written policies and procedures that are reasonably designed to prevent violations of the statute and its rules by the firm or its supervised persons. Robust policies and procedures are likely to prevent further compliance problems with the RIA’s:
- Investment selection;
- Choice of account type and decisions regarding whether conversion is necessary;
- Investment recommendations to ensure they are in clients’ best interest; and
- Disclosure of conflicts of interest.
Aside from implementing policies and procedures, RIAs must make certain that they are being adhered to by advisory personnel.
Takeaways
The concept of fiduciary duty can be abstract at times. Nevertheless, in situations like this, it is abundantly clear when an RIA and IARs are putting their own interests ahead of their clients. The SEC’s press release and order can be found at SEC.gov | Cambridge Investment Research Advisors, Inc.
About RIA Compliance Group: RIA Compliance Group is an investment adviser compliance consulting firm based in Delray Beach, Florida. The firm’s mission is to provide affordable, timely, practical, and cost-effective compliance advice. We help investment advisers to comply with the myriad of state and SEC regulations and compliance obligations facing their firms. RIA Compliance Group takes pride in giving personal service and real world compliance advice, not theoretical concepts and legalese. The firm interacts on a daily basis with SEC and state securities regulators.
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