SEC Sanctions Adviser, Affiliated Broker-Dealer and Their Owner Over Class A Share Purchases and Commissions Paid on ETF Trades

by Goodwin

The SEC settled claims against a registered investment adviser (the “Adviser”), its affiliated broker-dealer (the “Broker-Dealer”), and the founder, owner, and president of each (the “CEO”) that related to (1) investments in Class A shares of underlying funds made by funds managed by the Adviser (the “Funds”) and (2) commissions paid by the Funds to the Broker-Dealer for trades in exchange-traded funds (“ETFs”).  Without admitting or denying its findings, the Respondents agreed to the settlement order (the “Order”), which this article summarizes.


The Adviser manages the Funds and roughly 1,300 separately managed accounts, with combined assets under management of approximately $549 million as of May 24, 2013.  The Funds consist of a registered fund, whose president and chairman was the CEO prior to February 2012, and two privately-offered funds.  Each of the Funds invests principally in mutual funds.  The Broker-Dealer executes the Funds’ transactions in mutual funds.  Between June 2000 and mid-2010 (the “Relevant Period”), although the Funds often met the criteria to purchase  the institutional class of the mutual funds they purchased, which paid no 12b-1 fees, the Adviser and the CEO caused the Funds to purchase Class A shares of those funds, which paid 12b-1 fees.  (The Funds did not pay any front-end sales charges when they purchased Class A shares.)  During the Relevant Period, the Funds paid approximately $3.3 million in 12b-1 fees, which the distributors of the underlying mutual funds paid to the Broker-Dealer.  In May 2010, following communications with SEC staff about the Broker-Dealer’s receipt of 12b-1 fees on investments made by the registered Fund, the Adviser converted the registered Fund’s Class A mutual fund holdings to institutional shares.  The Broker-Dealer also refunded to the registered Fund all the 12b-1 fees it had received with respect to the registered Fund’s underlying mutual funds since the registered Fund’s inception.  The Adviser subsequently converted the private Funds’ Class A mutual fund holdings to institutional shares, but the Broker-Dealer did not refund 12b-1 fees collected on those investments.

The Funds also invested on occasion in ETFs.  The Broker-Dealer charged a commission of 0.25% on these trades, which in many instances resulted in commissions exceeding $0.10 per share.  The SEC found that by no later than October 2008, the commissions the Broker-Dealer charged the registered Fund for such transactions substantially exceeded the usual and customary commissions charged by other broker-dealers.  In October 2012, at the request of the registered Fund’s board, the Broker-Dealer refunded to the registered Fund an amount representing all commissions in excess of $.03 per share on the registered Fund’s ETF transactions between October 2008 and December 2011.

Disclosures – Best Execution and Broker-Dealer’s Receipt of 12b-1 Fees

The SEC found that the registered Fund’s registration statement, the private placement memorandums of the two private Funds, and the Form ADV of the Adviser contained misleading disclosures regarding the Adviser’s best execution policy and the circumstances under which the Broker-Dealer would receive 12b-1 fees as a result of the Funds’ investments in underlying mutual funds.  In general terms, these documents stated that the Adviser would seek best execution for Fund transactions.  The SEC found that while these disclosure documents stated that the Broker-Dealer could receive 12b-1 fees with respect to investments in underlying mutual funds, they did not state that the Adviser would select an investment in a fund paying 12b-1 fees to the Broker-Dealer even when lower-expense institutional class shares were available.


The SEC found the following violations of the federal securities laws:

  • willful violations by the Adviser and the CEO of the anti-fraud provisions of Section 206(2) of the Investment Advisers Act of 1940 (the “Advisers Act”) resulting from (1) the failure to seek best execution when selecting among underlying mutual fund classes for the Funds and (2) representations made to the board of the registered Fund that the Adviser sought best execution for its fund clients;
  • willful violations by the Adviser and the CEO of the anti-fraud prohibitions in Section 206(4) of the Advisers Act and Rule 206(4)-8(a)(1) thereunder (relating to the treatment of investors in pooled investment vehicles) resulting from materially misleading statements in the Funds’ respective offering documents regarding the Adviser’s policy of best execution;
  • willful violations by the CEO of the prohibitions in Section 34(b) of the Investment Company Act of 1940 (the “1940 Act”) against misleading statements in registered fund registration statements resulting from the misleading descriptions of the Adviser’s best execution policies in the registered Fund’s registration statement;
  • willful violations by the Respondents of the prohibition in Section 17(a)(2) of the Securities Act of 1933 against the offer or sale of securities by means of false or misleading statements; and
  • willful violations by the Broker-Dealer of Section 17(e)(2)(A)’s prohibition against any affiliated person of a registered investment company, or any affiliated person of such person, from receiving, in connection with transactions effected on an exchange for such registered investment company, any commission, fee, or other remuneration that exceeds the usual and customary broker’s commission for such transactions.  (The SEC found that the registered Fund’s procedures for board review and approval of affiliated brokerage transactions were not reasonably designed to ensure that the Broker-Dealer’s commissions were “reasonable and fair” compared to commissions charged by other broker-dealers, and therefore the safe harbor provided by Rule 17e-1 under the 1940 Act did not apply.)


Each of the Respondents agreed to a cease and desist order and censure.  The Broker-Dealer and the CEO also agreed jointly and severally to pay disgorgement and pre-judgment interest in the following amounts:

  • approximately $680,000 in disgorgement with respect to the private Funds plus approximately $263,000 in pre-judgment interest (the amount of disgorgement equaling the 12b-1 fees received by the Broker-Dealer with respect to underlying mutual funds that offered institutional shares); and
  • approximately $4,900 in prejudgment interest with respect to the amount voluntarily disgorged by the Broker-Dealer with respect to its receipt of excessive commissions on exchange transactions for the registered Fund  in violation of Section 17(e)(2)(A) of the 1940 Act.

The CEO further agreed to pay a civil penalty of $100,000.

In the Matter of Manarin Investment Counsel, et al., SEC Release No. 33-9462 (Oct.  2, 2013).

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this informational piece (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Written by:


Goodwin on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.