In a recent enforcement case, Shelton Financial Group, Inc. and Jeffrey Shelton, IAA Release No. 3993, a registered investment adviser and its sole owner, president, and chief compliance officer were found to have violated, among other provisions, the “anti-fraud” provisions under the Investment Advisers Act of 1940 (Advisers Act); this meant it failed to disclose to its clients’ and prospective clients’ compensation received by the advisory firm through an arrangement with a broker-dealer, thereby steering the adviser’s client investments into certain mutual funds managed by the broker-dealer’s affiliates.
According to the SEC’s complaint, the arrangement between the advisory firm and the broker-dealer commenced in 2008, and the adviser received payments from the broker starting in 2009. Until 2010, the adviser failed to disclose to clients and prospective clients the payments it received from the broker and the inherent conflict of interest associated with such payments. Part 2A of Form ADV (Item 14.A.) requires the disclosure by the investment adviser to clients and prospective clients of payments received from third parties, the resulting conflicts of interest, and how the investment adviser addresses such conflicts.
Finally in 2011, the adviser made an attempt to disclose the payments within its disclosure part of Form ADV, but did not fully disclose the payments under the broker agreement and the conflicts of interest with respect to the adviser, choosing the particular broker-dealer with whom it had the payment arrangement. Apparently, full disclosure of the payments and discussion about the conflicts of interest within the adviser’s Form ADV was not achieved until after the SEC had brought it to the attention of the adviser during a SEC examination.
The violations cited by the SEC in its complaint included the “anti-fraud” violations and failure to have and implement written policies and procedures reasonably designed to prevent such violations as required under the Advisers Act.
In determining the sanctions to levy against the adviser and its principal with respect to the violations under the Advisers Act, the SEC stated that it took into account the remedial acts promptly implemented by, and with the cooperation of, the adviser and its principal with the SEC.
In order to conclude the SEC’s enforcement action, among other things, the adviser agreed to: retain an independent compliance consultant to review the adviser’s policies and procedures, and make a full report to the SEC indicating the steps that have been taken by the adviser to prevent and detect similar violations; employ, for a period of five years, a chief compliance officer who is not an employee or officer of the adviser; the issuance of an SEC cease and desist order and an order of censure; the payment of disgorgement with interest of about $120,000, and of a civil penalty in the amount of $70,000