RIA Compliance Blog
On June 4, 2018, the Securities and Exchange Commission issued an Order Instituting Administrative and Cease-and-Desist Proceedings against deVere USA, Inc. (“deVere”), a registered investment adviser. The SEC’s Order alleges that deVere failed “to make full and fair disclosure to clients and prospective clients of material conflicts of interest regarding compensation obtained from third-party product and service providers.” The Order also alleges that deVere made inadequate disclosures in its Form ADV, did not conform its compliance program to its method of doing business, and did not follow compliance requirements adopted in its compliance manual. deVere submitted an offer of settlement in conjunction with the SEC’s Order.
According to the SEC’s Order, deVere’s clients consisted predominantly of United States citizens or residents who were the owners of United Kingdom defined benefit or defined contribution pensions stemming from prior employment in the United Kingdom. Until about March 2017, deVere’s principal business “involved recommending that its clients elect to take a cash equivalent transfer value from their U.K. defined benefit or defined contribution pensions and transfer to a [Qualifying Recognised Overseas Pension Scheme (“QROPS”)] for which deVere would provide ongoing investment advice on a nondiscretionary basis.” In making these recommendations, deVere advised its clients utilize the services and products of third-party firms which would set up custodial accounts to hold the QROPS in and to make investments.
Beginning in early 2013 until about the fall of 2014, deVere advised its QROPS clients to set up accounts chiefly with European multi-asset funds and structured notes that typically imposed an entry fee of about four to five percent. If deVere declined to waive the fee, an overseas affiliate received the fee and subsequently paid a deVere investment adviser representative about half of the fee. deVere allegedly knew about this arrangement and did not inform clients that some of its investment adviser representatives had an economic interest in the fees, which constituted a conflict of interest.
deVere also advised some of its clients to convert all or some of their United Kingdom pension cash equivalent transfer value from British Pounds to United States Dollars or Euros before placing it in a QROPS. The foreign exchange provider, a deVere affiliate, typically charged a fee amounting to one percent of the currency to be exchanged. The provider had also allegedly agreed to pay some of this fee to the DVU investment adviser representative who recommended that the client invest in a QROPS. The SEC found that DVU neglected to inform its clients of this arrangement, despite the fact that it created a conflict of interest, until about March of 2017. The SEC also found that deVere neglected to disclose the above compensation arrangements in its Form ADV Part 2A for a number of years.
The SEC also found that deVere’s compliance policies and procedures were insufficient because they did not conform to DVU’s method of doing business. For example, before about December 2015, deVere lacked policies and procedures pertaining to its QROPS business and the conflicts of interest related to the compensation deVere representatives received from third parties in connection with the QROPS business. Moreover, the SEC found that deVere did not abide by several of the policies and procedures it had adopted.
The SEC’s Order requires deVere to pay a civil money penalty of $8 million. In reaching these decisions, the SEC took into account remedial measures that deVere undertook.
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