SEC, Advisor-Broker Settle Retail Customer Overcharges
The retail brokerage focus of the Enforcement Division is readily apparent in its latest case. There a dual registered investment adviser broker-dealer misrepresented its services and charges to clients, repeatedly over-charging and under serving them for years. The disgorgement, prejudgment interest and penalty imposed in the settlement will be used to repay those investors. In the Matter of BB&T Securities, LLC, Adm. Proc. File No. 3-19020 (March 5, 2019).
BB&T is the successor-in-interest to Valley Forge Asset Management, LLC. Over a three year period beginning in 2013 the firm provided investment management services to individuals, foundations, endowments and public funds. It also furnished brokerage services using the same office space and many of the same employees. The firm had few brokerage only clients.
Clients had a choice of three brokerage options: Under the first, called “Affiliated Brokerage,” a client could direct their brokerage to the firm’s “full service brokerage.” Clients could negotiate the commission. This option was supposed to provide a “benefit monetarily” from the negotiated rate. While the firm acknowledged this could be viewed as a conflict, and that similar services may be available at higher or lower rates from other firms, generally clients were informed that the discounts were at least 70%. Service was supposed to be high.
Option two, known as “Directed Brokerage,” permitted the client to designate a preferred broker. Under this option the client selected a third-party broker. About 40% of the firm’s clients elected this option.
Option three, called Discretionary Brokerage,” permitted the client to choose a preferred broker. BB&T, however, had discretion to select the firm for each trade on a “best price and execution basis.” Few clients selected this option.
BB&T’s statements regarding option one gave clients the impression they would receive a high level of service at a low cost. The services provided were not disclosed. The client was thus precluded from making any comparison.
Clients were also misled regarding the amount of the fees. While clients electing this option could in fact negotiate a discount, the fee charged was typically much higher than those available at other brokers. Overall, the disclosures made in the Firm’s ADV Part 2 regarding its brokerage services were false and misleading, suggesting a high degree of service for a low price. Neither claim was true. The firm benefitted from about $4.7 million in excess compensation. Clients were harmed by being underserved and overcharged. The Order alleges violations of Advisers Act Sections 206(2) and 207.
To resolve the proceedings the firm consented to the entry of a cease and desist order based on the sections cited. In addition, the firm will pay disgorgement of $4,712,366 prejudgment interest of $497,387 and a penalty of $500,000.
The Commission considered the remedial acts of BB&T. Those included ending the Affiliated Brokerage program, amending the cost structure of in-house brokerage, amending the pertinent disclosures and the cooperation afforded the staff.
Program: Women in Compliance, March 9, 2019 at the offices of Dorsey & Whitney, LLC, New York New York. Details and registration are here.