In a recent enforcement action by the SEC, an Ohio-based registered investment adviser and its principals (In the matter of Everhart Financial Group, Inc., Richard Scott Everhart, and Matthew James Romeo, Release No. IA 4314, January 14, 2016) were found by the SEC to have violated the “anti-fraud” provisions under the Investment Advisers Act of 1940 for recommending investments to clients in a mutual fund that paid 12b-1 fees over funds that did not pay such fees. It was advantageous for the investment adviser to recommend the fund that paid 12b-1 fees because such fees were paid to the adviser’s principals, who were registered representatives of a broker-dealer.
During 2010-2015, when the adviser’s clients were placed in the fund with the 12b-1 payments, the adviser failed to disclose that payments were made to the fund’s principals, and the conflict of interest that accompanied the receipt of such payments.
In addition, the SEC found that the adviser failed to perform annual compliance reviews during six of the previous seven years.
In order to resolve the matter, the adviser agreed to:
- Engage an independent compliance consultant to conduct compliance reviews during each of the next two years and provide the SEC with the consultant’s findings
- Designate a non-principal as the firm’s chief compliance officer to hold such position for a period of at least five years
- Require the firm’s compliance officer to complete 30 hours of compliance training
- Provide to each of its current and prospective clients a copy of the SEC order for a period of one year
- Issue a cease and desist order and order of censure
- Pay total disgorgement and interest of more than $225,000
- Pay civil penalty payments collectively of $140,000.