SEC fines RIA for failure to disclosure conflicts of interest on Form ADV

In a consented-to Administrative Order dated July 2, 2014, the Securities and Exchange Commission fined a Missouri-based Registered Investment Adviser, SignalPoint Asset Management (“SignalPoint” or “SAM”), $215,000 for breaching its’ fiduciary duty to clients.

Prior to the formation of SignalPoint, the Principals of SignalPoint were registered as registered representatives and investment adviser representatives for a dually-registered broker-dealer and investment adviser. In 2008, the principals asked the dually-registered broker-dealer and investment adviser to allow them to have ownership and control of SignalPoint but were told that they could not have an ownership in an outside RIA.

Later that year the principals created SignalPoint, a registered investment advisory firm, and designated three nominee owners to own the new RIA. These nominees did not participate in business decisions of the firm and provided no capital for their ownership. There was an oral agreement between the principals and nominees that the principals would become owners of the RIA once the dually-registered broker-dealer allowed it.

In the SEC’s Order Instituting Cease and Desist Proceedings against SignalPoint, the SEC alleged that the RIA’s Form ADV was deficient because it did not disclose the principals as control persons. The SEC further states that the Chief Compliance Officer is responsible for drafting and filing the Form ADV to make sure it is accurate.

The Principals breached their fiduciary duty by failing to disclose all material facts concerning the extent of their ability to direct SAM’s management and policies. The Principals also breached their fiduciary duty by failing to disclose their existing and potential conflicts of interest when advising clients to invest with SAM. In particular, they failed to disclose to clients that they had loaned substantial amounts of money to SAM and therefore stood to indirectly benefit from clients’ payment of advisory fees to SAM.

The Principals of the RIA encouraged clients to invest with the firm. However, they did not disclose their control of the RIA and conflicts of interest associated with the potential profits and capitalization of SignalPoint. The SEC stated that the money the principals gave the RIA, the nominees voluntarily transferring shares of ownership to the principals, and the principals direct participation in operations and management of the company were direct evidence of the Principals control of the RIA.

The SEC’s action in this case highlights the importance of an RIA fully appreciating and disclosing all material relationships that may create conflicts of interest.

Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds and issuers of securities, among others. Our regulatory practice group assists financial service providers with the complex issues that arise in the course of their businesses, including compliance with federal and state laws and rules.

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