Pursuant to an order dated June 4, 2018 (the Order), the SEC settled an administrative proceeding against investment adviser deVere USA, Inc. (DVU) alleging that DVU failed to disclose material conflicts of interest regarding compensation obtained from third-party product and service providers. The Order assessed a civil monetary penalty of $8,000,000, among other remedies.
According to the Order, DVU’s primary business involved providing investment advice to holders of UK pension assets, specifically regarding transfers to overseas retirement plans that constituted “Qualifying Recognised Overseas Pension Schemes” (QROPS) under UK tax regulations. DVU would consult on the transfer of its client pension assets to QROPS, including recommending third-party QROPS trustees and custodians, and provide ongoing investment advice on a non-discretionary basis.
The Order alleges that, between June 2013 and March 2016, DVU failed to disclose to clients certain compensation arrangements between QROPS trustees and QROPS custodians that presented material conflicts of interest. Specifically, upon the transfer of pension assets to a QROPS custodian, clients paid an annual “establishment fee” to the QROPS custodian. Although clients were aware of the establishment fee, the Order alleges that clients were not informed that the establishment fees served as the basis for payments by the QROPS custodian to an overseas DVU affiliate of an amount equivalent to 7% of the transferred assets, which were, in turn, paid directly to the DVU investment adviser representative that recommended the transfer as their primary source of compensation. QROPS custodians allegedly also paid bonuses to the DVU affiliate for meeting certain annual business targets. The Order provides that DVU failed to disclose similar compensation arrangements with the QROPS trustees, as well as certain QROPS assets and foreign exchange providers recommended by DVU.
The Order states that these compensation arrangements represented material conflicts of interest that were required to be disclosed to clients. Instead, according to the Order, DVU misrepresented itself as a “fee-only” operation and failed to tailor its policies and procedures to properly address the compensation arrangements and the conflicts of interest created by such arrangements. DVU’s Form ADV similarly stated that DVU did not receive any portion of commissions or transaction fees, and that each DVU investment adviser representative further represented that investment adviser representatives received no economic benefit from any person other than the client.
The Order further alleges that DVU made material misrepresentations and omissions concerning QROPS benefits. According to the Order, DVU investment adviser representatives often omitted material information regarding the risk that transfers of UK assets to QROPS may result in U.S. income tax liability, and failed to disclose limits instituted on clients’ investment choices by QROPS trustees.
Without admitting or denying the findings set forth in the Order, DVU agreed to be censured, to cease and desist from violating and causing violations of applicable provisions of the Investment Advisers Act of 1940 and the rules thereunder and to pay a $8,000,000 civil monetary penalty. In addition, the SEC ordered DVU to provide its employees with fiduciary duty training and to retain an independent compliance consultant to review and make recommendations with respect to DVU’s compliance policies, procedures and systems.
The Order is available at: https://www.sec.gov/litigation/admin/2018/ia-4993.pdf