SEC Slaps Advisor with Multimillion-Dollar Penalty for Conflicts of Interest Non-Disclosure
The SEC has slapped New York-based investment advisor deVere USA with an $8 million civil penalty for failing to disclose conflicts of interest to its retail clients.
The firm has agreed to pay the amount in a settlement that will lead to the creation of a Fair Fund from which the penalty will be distributed to affected clients, according to the watchdog.
The SEC says it has also filed a complaint against former deVere USA CEO Benjamin Alderson and former manager Bradley Hamilton.
“Investment advisers have an obligation to disclose direct and indirect financial incentives,” Marc Berger, director of the SEC’s New York regional office, says in a statement. “deVere USA brushed aside this duty while advising retail investors about their retirement assets.”
Since deVere USA failed to disclose its agreements with overseas product and service providers, clients didn’t know the firm and an overseas affiliate were receiving compensation from those third-party product and service providers, according to an SEC order.
Thomas Potter, a partner at the Burr & Forman law firm in Nashville, Tenn., says the relatively large penalty is most likely due to the severity of the violations and the amount and value of accounts involved.
Without admitting or denying the SEC’s findings, deVere USA consented to the watchdog’s order, which states that the firm violated the Investment Advisers Act of 1940, including the antifraud provisions. The order imposes remedies that include the $8 million penalty and engaging an independent compliance consultant to conduct a review of the firm’s compliance policies and procedures.
The SEC doesn’t identify the specific clients, number of accounts or the total amount of assets affected. The watchdog says, however, that the clients are primarily U.S. residents or citizens who held U.K. defined benefit and defined contribution pensions.
The SEC says the undisclosed compensation, which included an amount equivalent to 7% of a pension transfer value, incentivized deVere USA to recommend a pension transfer and particular product or service providers.
The watchdog adds that deVere USA made materially misleading statements about tax treatment and available investment options.
Burr & Forman’s Potter says the SEC has been “ramping up” its efforts to go after advisors that violate conflicts of interest and disclosure rules. He notes that its closer monitoring of mutual funds share class violations is an example of this.
Although deVere USA is held to fiduciary standards, Potter says “it wouldn’t be unreasonable” to expect broker-dealers to monitor the SEC’s actions related to conflicts of interest or advisors' disclosure rules because these actions are a “shot across the bow.”
The SEC’s proposed Regulation Best Interest requires broker-dealers to have a duty to act in the best interest of retail customers when making a recommendation – at the time the recommendation is made – without putting their own financial or other interest ahead of the retail customer. Broker-dealers are required to perform this duty by complying with disclosure, care and conflict of interest obligations.
Meanwhile, the SEC filed its complaint against Alderson and Hamilton before the U.S. District Court of the Southern District of New York.
SEC records show that Alderson was registered with deVere USA from August 2013 until May 2017. He has been registered since November 2017 with Touchstone Advisory, which he founded. FA-IQ reached out to Alderson for this article but didn’t receive a reply as of this writing.
SEC records show that Hamilton was registered with deVere USA from July 2014 to June 2017. He has been registered since December 2017 with Blacktower Financial Management (US), where he is a senior wealth manager, according to his LinkedIn profile. Hamilton could not be reached for comment.
The SEC alleges that Alderson and Hamilton violated the Investment Advisers Act and seeks an injunction, disgorgement plus interest, and civil money penalties. The watchdog also alleges that Alderson and Hamilton misled clients and prospective clients about the benefits of pension transfers while concealing material conflicts of interest, including the substantial compensation that Alderson and Hamilton personally stood to receive.