The Commission filed two settled administrative proceedings this week against investment advisers. Each centered on the disclosures made to clients. One involved advertisements while the other involved the fees charged.
The first named as a respondent BTS Asset Management, Inc., a registered investment adviser based in Lexington, Massachusetts. The adviser had operated the BTS High Yield Bond Fund program since 1981. Under the program clients apply buy/sell signals from the adviser to mutual funds or variable annuities they select in the high yield bond sector. The funds are not affiliated with BTS. The goal is to invest in the high yield bond market when it is moving up and move assets into a related money fund when it is not with a view toward capital preservation.
Since the early 1990s the advertisements for the bond program have claimed that it has had “no down years” since it’s the inception. That claim is based on a model that applied the BTS buy/sell signals at various times to a single high yield bond fund, a composite of six high yield bond funds or a composite of five high yield bond funds none of which were affiliated with BTS. The advertisements disclose these facts and offered to identify the funds, noting that results may vary.
In 2005 BTS learned that about half of its clients would have had a down year in 2004 with losses of up to 3.3% following the buy/sell signals. The fact that a significant percentage of its clients likely would have had results which materially varied from the “no down year” claim made the advertisements false and misleading, violating Advisers Act Section 206(4), according to the Order.
To resolve the proceeding the adviser agreed to implement a series of procedures which include the retention of an independent consultant to review its compliance policies and procedures. BTS also agreed to the entry of a cease and desist order based on the Section cited in the Order and a censure. The firm will pay a $200,000 penalty as part of the settlement. In the Matter of BTS Asset Management, Inc., Adm. Proc. File No. 3-15082 (Oct. 29, 2012).
The second named as Respondents Tilden Louchs & Woodnorth, LLC, Woodnorth, LLC, LaSalle St. Securities, LLC and Ralph Loucks. Tilden is a registered investment adviser that was formed by Mr. Loucks. LaSalle is a registered broker dealer.
Tilden’s clients all maintained brokerage accounts at LaSalle which administered its back office functions. The adviser utilized primarily a “buy and hold” strategy. Most of the trades for Tilden’s clients are executed by LaSalle. Tilden paid LaSalle certain fees for executing each trade under an arrangement set up by Mr. Louck.
Beginning in late October 2007, and continuing until early 2012, Tilden charged client commissions that exceeded the fees it paid LaSalle to execute trades. The higher commissions represented undisclosed compensation for Tilden and Mr. Loucks. Under this arrangement clients paid on average $143.77 per trade, according to the Order. At the same time Tilden paid LaSalle an average of $37.47 to execute the trades. The excess went to Tilden. The arrangement was not disclosed. To the contrary, the Forms ADV told clients they were getting a discount. Tilden had over $186,000 in undisclosed compensation, shared by Mr. Loucks. The Order alleges violations of Advisers Act Section 206(2) and 207.
To resolve the proceeding Tilden agreed to implement certain procedures. In addition, Tilden and Mr. Loucks consented to the entry of cease and desist orders based on Section 206(2) and 207. LaSalle consented to a similar order based on Section 206(2). Both entities agreed to the entry of a censure and to pay, jointly and severally, disgorgement of $170,319.94 along with prejudgment interest. The three Respondents also agreed, jointly and severally, to pay disgorgement of $16,288.18 along with prejudgment interest. Tilden and LaSalle will each pay a penalty of $100,000 while Mr. Loucks will pay $25,000. In the Matter of Tilden Loucks & Woodnorth, LLC, Adm. Proc. File No. 3-15081 (Oct. 29, 2012).
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