Court Unearths Loan Disclosure Trap for Advisors
A recent SEC case shows that financial advisors must fully disclose potential conflicts of interest to their attorneys and take the necessary steps to then disclose them to clients, Reuters writes.
In September the regulator ordered California-based advice firm Sagent Wealth Management and Marshall Eichenauer, Jr., its majority owner, to pay a civil penalty of $165,000 and disgorgement of $15,380, according to the newswire.
Sagent and Eichenauer failed to get client consent for loans that consisted of funds managed by Sagent and Eichenauer, or disclose that the loans benefitted Eichenauer, Reuters reports.
Eichenauer had owned 80% of Sagent, with the other 20% owned by Sagent Private Investment Fund I, which was also formed by Eichenauer and where he was in charge of the management entity that controlled it, according to the newswire.
Eichenauer collected a 1.25% asset-based management fee from SPIF, an annual distribution of $450,000 and, starting in July 2012, $1 million paid annually by Sagent, Reuters writes. In 2011 and 2012 Sagent didn’t generate sufficient revenue to cover Eichenauer’s distributions and in March 2012 began using proceeds of sales of SPIF’s publicly-traded securities to make loans to Sagent so that it could pay him at least partially, according to the newswire. By 2015, Sagent received $326,650 in loans from SPIF, of which $166,400 went to Eichenauer, according to the SEC’s settlement cited by Reuters. And SPIF paid Eichenauer or Sagent $15,380 for managing the loans from March 2012 until SPIF’s closure in May 2016, according to the settlement cited by the newswire.
Eichenauer had consulted with an outside counsel about the loans but failed to fully disclose information, according to the newswire. As a result, the lawyer wasn’t alerted to potential conflicts of interest and Eichenauer didn’t receive advice on how to disclose them to clients, Reuters writes.
In light of his conflict of interest as an owner of SPIF and beneficiary of the loaned funds, the only advice he sought, according to the SEC, was whether he needed the consent of SPIF investors to make the loans, the newswire reports.
Lawyers “are retained to perform specific services,” Reuters writes, and aren’t required to follow up on any work unless asked by the client. The advice firm, not the lawyer, is responsible for asking for written client consent and to disclose any conflicts of interest to stakeholders, according to the newswire.