The Securities and Exchange Commission recently instituted a settled administrative proceeding against two Portland, Oregon-based investment advisory firms and their owner regarding the failure to disclose a revenue-sharing agreement and other potential conflicts of interest to clients.
The SEC’s investigation found violations in three areas of the advisory business run by Christopher Keil Hicks, who owns Focus Point Solutions and The H Group. Most notably, Focus Point did not disclose to customers that it was receiving revenue-sharing payments from a brokerage firm that managed a particular category of mutual funds being recommended to Focus Point clients. Because Focus Point received a percentage of every dollar that its clients invested in these mutual funds, there was an incentive to recommend these funds over other investment opportunities in order to generate additional revenue for the firm.
Without admitting or denying the SEC’s charges, Hicks, Focus Point, and The H Group agreed to pay a combined $1.1 million to settle the case.
“Payments to investment advisers for recommending certain types of investments may corrupt their ability to provide impartial advice to their clients,” said Bruce Karpati, Chief of the SEC Enforcement Division’s Asset Management Unit. “Hicks and his firms kept their clients in the dark about this and other conflicts of interest that investors are entitled to know about and advisers must disclose.”
The Asset Management Unit and the SEC’s San Francisco Regional Office have commenced an initiative to shed more light on revenue-sharing arrangements between investment advisers and brokers.
“We will continue to focus our enforcement and examination efforts on uncovering arrangements where advisers receive undisclosed compensation and conceal conflicts of interest from investors,” said Marc J. Fagel, Director of the SEC’s San Francisco Regional Office.
According to the SEC’s order instituting settled administrative proceedings against Hicks and his firms, there were two additional ways that they failed to disclose conflicts of interest while seeking approval to have Focus Point added as the sub-adviser to a mutual fund called the Generations Multi-Strategy Fund:
- While seeking required approval from the fund’s trustees, Focus Point misrepresented that it would receive no payments other than fees paid under the sub-advisory contract. However, unbeknownst to the trustees, the fund’s primary adviser had a separate payment arrangement with Focus Point. Therefore, Focus Point was required to disclose that payment arrangement to the fund’s trustees.
- Focus Point’s request to be retained as sub-adviser to Generations also required the approval of Generations’ shareholders, the vast majority of whom were clients of The H Group. Thus, The H Group had a potential conflict of interest as a related entity to Focus Point, which stood to reap additional fees from the mutual fund that The H Group recommended to many of its clients. Therefore, The H Group’s proxy voting policy required the proxies to be voted by the investors themselves. Instead, The H Group itself voted its clients’ proxies in favor of the proposal to add Focus Point as a sub-adviser.
The SEC’s order finds that Focus Point willfully violated Sections 206(2) and 207 of the Investment Advisers Act of 1940 and Section 15(c) of the Investment Company Act of 1940 and that Hicks willfully aided and abetted and caused those violations. The order also finds that The H Group willfully violated Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-6 thereunder. Without admitting or denying the SEC’s findings, Focus Point agreed to disgorge $900,000 in ill-gotten gains, pay a $100,000 penalty, and hire an independent consultant to conduct comprehensive compliance reviews of the firm. The H Group and Hicks agreed to each pay a $50,000 penalty. Hicks and his firms also agreed to a censure and to cease and desist from committing or causing any violations and any future violations of these provisions.