SEC Proceedings Against IAs Center On Conflicts of Interest

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Conflicts of interest are at the center of two administrative proceedings recently instituted by the SEC. One involved the failure to adequately disclose the conflict. The other focuses on a failure to institute appropriate supervisory procedures for a known conflict. In the Matter of The Robare Group, Adm. Proc. File No. 3-16047 (September 2, 2014); In the Matter of Structure Portfolio Management, L.L.C., Adm. Proc. File No. 3-16046 (August 28, 2014).

The Robare Group names as Respondents the registered investment adviser, its founder, Mark Robare, and a limited partner, Jack Jones. The allegations in the Order focus on an undisclosed arrangement between the adviser and its Broker. Robare Group, which offers portfolio management services, has from inception used the Broker for execution, custody and clearing services for advisory clients. The adviser recommends that its client invest in several mutual funds offered on the Broker’s platform.

In 2004 Robare Group and the Broker entered into a Commission Schedule and Servicing Fee Agreement. The agreement provided in part that the adviser would recommend No Transaction Fee funds offered on the Broker’s platform. In return the Broker would pay from 2 to 12 basis points to the adviser. That agreement remained in effect until late 2012 when a new Investment Advisor Custodial Support Services Agreement was executed. It also provided that the Broker would pay the adviser for clients that invested in its funds.

The initial agreement was not disclosed in the adviser’s Form ADV until December 2011. That Form ADV did, however, identify the conflict of interest. It also stated that the adviser “may” receive compensation when it fact it was being paid. Later the disclosure was later modified to reference the custodial arrangement. It stated that the advisor’s arrangement may be a conflict with regard to recommending the Broker for custody. The filing failed to identify the incentive regarding the funds.

The Order alleges violations of Advisers Act Sections 206(1), 206(2) and 207. The proceeding will be set for hearing.

Structured Portfolio names as Respondents three registered investment advisers, Structured Portfolio, SPM Jr., L.L.C. and SPMIV, L.L.C. Portfolio Management holds a 90% ownership interest in SPM Jr. and later formed SPMIV.

By 2006 three funds were advised. Hedge Trader was appointed as the portfolio manager for each fund. For one fund his sole responsibility was to make a profit. For the other two Hedge Trader was tasked with hedging interest rate risk. On a typical day Hedge Trader traded Treasury securities for each for each fund. This created a potential conflict of interest regarding the allocation of the purchases among the three funds.

The Compliance Manual stated that trades would be allocated in a fair and equitable manner. Trade blotters were maintained. Those were reviewed by a member of the operations staff on a daily basis.

From 2006 through 2009 when one of the funds was closed, concerns were raised regarding the allocation of trades. In August 2006 internal concerns were raised suggesting one fund may have been obtaining more favorable execution prices. In response Hedge Trader was removed from trading for two of the funds while acting for the third for about six months. When Hedge Trader began trading for all three funds certain oral instructions were given regarding more frequent oversight of the trades. Those oral instructions were not reduced to writing.

During the annual compliance review in November 2008 an independent firm separately raised trade allocation concerns. In 2009 internal concerns were again raised. This time the issue focused on the trading performance of one fund. Reviews by outside counsel were inconclusive. In March 2009 one fund was closed.

Throughout the period Structured Portfolio was aware of the potential conflict regarding trade allocations which was disclosed. At the same time Structured Portfolio failed to adopt and implement written policies and procedures to detect and prevent improper trade allocations, according to the Order. It also failed to adopt and implement written policies and procedures to prevent inaccurate disclosures regarding its funds and their investment strategies. The Order alleges violations of Advisers Act Sections 206(4) and Rule 206(4)(-7).

To resolve the proceeding Portfolio Management entered into a series of undertakings which including the retention of an independent consultant, record keeping, notice to clients and a certification of compliance. Each Respondent also consented to the entry of a cease and desist order based on the Section and Rule cited in the Order and a censure. They will also pay, jointly and severally, a penalty of $300,000.

Topics:  Compliance, Conflicts of Interest, Enforcement, Enforcement Actions, SEC

Published In: Administrative Agency Updates, General Business Updates, Finance & Banking Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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