In September 2014, the SEC issued an order instituting administrative proceedings against respondents The Robare Group, Ltd., a registered investment adviser (“Adviser”) and its principals, Mark Robare and Jack Jones, Jr., alleging violations of the Advisers Act based on the Adviser’s failure to disclose financial incentives it had in recommending particular mutual funds to its advisory clients. Specifically, the SEC alleged that the Adviser failed to disclose in its Form ADV compensation it received through a commission schedule and servicing fee agreement (the “Agreement”) with a registered broker-dealer (“Broker”) for client assets that were invested in certain mutual funds offered on the Broker’s platform and the conflicts of interest to clients arising from that compensation arrangement. According to the SEC’s allegations, from 2005 until the Adviser filed its December 2011 Form ADV, the Adviser failed to disclose the existence of the Agreement, which had been executed in 2004; beginning in December 2011, the SEC alleged, the Adviser inadequately disclosed the arrangement and “still failed to disclose that it had an incentive to prefer certain [mutual] funds as a result of the arrangement.”
On June 4, 2015, an SEC administrative law judge issued an initial decision dismissing all charges against the respondents after finding, among other things, that the SEC failed to show that the respondents acted with scienter. Of note, the administrative law judge concluded that the respondents had prepared the Form ADV disclosure in question in reliance in good faith upon the advice of third-party compliance consultants, and that the consultants’ advice was “facially valid.”
On June 25, 2015, the SEC Division of Enforcement filed a petition for review of the initial decision, seeking reversal of the administrative law judge’s decision to dismiss, a finding of liability and the imposition of sanctions. The Division of Enforcement’s petition took issue with the judge’s decision as a matter of public policy, claiming that the decision “shifts the burden of fully disclosing a conflict of interest from an investment adviser, who has a fiduciary duty to and a relationship with clients, to a compliance consultant (who has no such connection).” The Division asserted that the administrative law judge’s decision, if allowed to stand, could “significantly weaken the long-standing fiduciary standards applicable to investment advisers.” On July 10, 2015, the respondents moved for summary affirmance of the administrative law judge’s decision.
On August 12, 2015, the SEC issued an order denying the respondents’ petition for summary affirmance and granting the Division of Enforcement’s petition for review. In granting the petition for review, the SEC noted the “potentially important matters of public interest this case presents . . . .” The Division has until September 11, 2015 to file a brief in support of the petition for review. The respondents’ brief in opposition must be filed by October 12, 2015, and any reply brief must be filed by October 26, 2015.