Revenue Sharing Arrangements to Get Heightened SEC Scrutiny

Investment advisers and broker-dealer should be aware that SEC through its Asset Management Unit has commenced an initiative aimed at shedding more light on revenue-sharing arrangements between investment advisers and brokers.

The SEC has announced that it will continue to focus enforcement and examination efforts on uncovering arrangements between advisers and broker-dealers where advisers receive undisclosed compensation and conceal such conflicts of interest from clients.

The Commission recently instituted a settled administrative proceeding against  Focus Point Solutions and The H Group, two Portland, Oregon-based investment advisory firms, and their owner over their failure to disclose to clients a revenue-sharing agreement and other potential conflicts of interest.

The SEC’s investigation found that the two firms and their owner failed to disclose to customers that they were receiving revenue-sharing payments from a brokerage firm that managed a particular category of mutual funds being recommended to Focus Point’s clients.  Since Focus Point received a percentage of every dollar that its clients invested in the mutual funds, there was an incentive to recommend these funds over other investment  opportunities in order to generate additional revenue for the firm.

 As part of the arrangement , the broker agreed to pay Focus Point for all client assets that Focus Point invested in certain mutual funds.  In exchange, Focus Point agreed to provide certain custodial support services to the broker.  The SEC found that the agreement created incentives for Focus Point to favor a particular category of mutual funds over other investments.

 Focus Point also provided misleading information about its fee structure to  trustees of a mutual fund Focus Point for whom was seeking approval to become the sub-adviser.  During the sub-adviser to the fund hiring process,  Focus Point told the trustees that Focus Point would not receive any compensation beyond its sub-advisory fee.  This was not true.  Unbeknownst to the trustees, Focus Point had an arrangement with the fund’s primary adviser whereby the primary adviser would compensate Focus Point.

As part of the SEC’s Order entered in the case, Focus Point, The H Group and its owner were censured and agreed to pay a combined $1.1 million to settle the case.

Author: Dexter Johnson

The author is a an attorney who for the past 14 years has concentrated his practice in representing, successfully, investment advisers, broker-dealers, corporations and individuals who are subject to SEC, FINRA, State or other regulations and who may be the subject of regulatory examination, review or investigation. He formerly worked at the SEC. His regulatory and litigation experience has encompassed virtually every type of securities issue in the industry. He has also negotiated favorable outcomes in many of these matters for his clients.