On June 2, 2025, the SEC accused a state-registered investment adviser and its owner/managing member of breaching their fiduciary duties. The SEC’s complaint alleged that the defendants defrauded their advisory clients by making false and misleading fee disclosures. In addition, the complaint contended that the Registered Investment Adviser (RIA) and its owner failed to disclose conflicts of interest created by their fee practices.
Allegations regarding false and misleading statements made by the RIA and its owner
The New Mexico-based RIA and its owner falsely disclosed that they would “take care to assure” that the firm’s annual advisory fees would not be higher than two percent of a client’s assets under management. Nevertheless, the RIA, through its owner, ignored the advisory fee ceiling they promised. They did not take steps to limit advisory fees to two percent and charged numerous clients more than that amount. The owner knew, or was reckless in not knowing and should have known, that the RIA billed clients in excess of two percent. During the period covered by the complaint, the RIA and its owner received approximately $125,000 in advisory fees over and above the two percent annual limit that was disclosed to clients.
The RIA and its owner made no effort to prevent clients from being overcharged. The SEC’s complaint alleged that the owner used subjective criteria to calculate the amount of advisory fees charged. For example, the owner raised the fee if he found the client to be demanding.
The RIA charged hourly fees that came as a surprise to clients
The SEC also alleged that the defendants breached their fiduciary duties in connection with their billing of hourly fees. The RIA and its owner engaged in the practice of charging hourly fees to clients without notifying them that they were providing specific services with an added cost.
The complaint alleged that the RIA and its owner misled clients by disclosing that the firm “may” offer hourly fee services. The RIA was already providing those services without informing clients about the amount charged. Furthermore, the RIA and its owner did not disclose the financial conflicts of interest that went hand-in-hand with their charging of hourly fees.
The defendants also did not disclose to clients that hourly fees could be charged without notice. According to the complaint, the RIA and its owner received roughly $325,000 in hourly fees. Typically, the owner documented the fees charged with handwritten notes that only provided a cursory description of the services that were purportedly rendered.
The RIA and its owner billed numerous hourly fees to clients without disclosing that they were receiving additional compensation for providing those services. They acted unilaterally without seeking or acquiring the clients’ agreement to pay the fees for those specific services. A number of clients who were charged hourly fees were surprised to learn that they had been billed for certain services.
Several clients were unaware that the owner had even performed the work for which they were charged. If they did have a conversation with the owner about a topic, multiple clients thought he was doing so either as part of the RIA’s investment advisory services or in his capacity as a personal friend or acquaintance. Many clients were surprised by the amount of time he charged for those conversations.
Overview of Section 206 of the Investment Advisers Act of 1940
Section 206 of the Investment Advisers Act is the general anti-fraud provision that applies to RIAs. Section 206 gives rise to the fiduciary duties owed to advisory clients. Whether an RIA is state or SEC-registered, the firm owes a fiduciary obligation to put clients’ interests ahead of its own. An RIA or an Investment Adviser Representative is forbidden from engaging in any act, practice, or course of business, which is fraudulent, deceptive, or manipulative.
The SEC’s complaint charged this RIA and its owner with violating the anti-fraud provisions of Sections 206(1) and 206(2) of the Investment Advisers Act. The SEC is seeking a number of remedies including:
- Permanent injunctions;
- Conduct-based injunctions;
- Disgorgement of ill-gotten gains;
- Pre-judgment interest;
- Civil penalties from both the RIA and its owner.
In addition, any complaint brought by the SEC or state securities regulators against an investment adviser brings reputational damage.
Takeaways
The SEC has the authority to pursue legal remedies against state-registered advisers, especially in cases where there is fraud or other egregious misconduct. While the SEC usually leaves enforcement to a state regulator where an adviser is registered, the Commission may determine that its intervention is necessary to prevent further harm to investors.
In this case, the SEC’s involvement may have been triggered by the Commission’s prior dealings with the owner and his firm. In a July 16, 2016 post, Investment News reporter, Mark Schoeff, Jr., wrote that the SEC had fined the owner $25,000 for indicating on his Form ADV for several years that his RIA operated in Wyoming, not Santa Fe, New Mexico, where he was actually conducting business. According to the article, the owner rarely came to his rented office in Wyoming. The SEC also charged him with overstating the RIA’s assets under management on the firm’s Form ADV. At the time, Wyoming did not regulate investment advisers, and they were required to register with the SEC, even if they did not have $100 million in assets under management. The SEC’s complaint is available Here.
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.
RIA Compliance Group, LLC – 701 SE 6th Ave, Suite 201, Delray Beach, FL 33483 – Tel: 561-600-0564 –
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