The retail investor focus of SEC Enforcement has accelerated the recent trend of filing actions against investment advisers. Indeed, the number actions involving advisers has steadily increased to the point where it may eclipse those of all other categories. That should not be surprising since many, if not most, small investors hold their investments in funds, 401Ks, pensions and similar vehicles.
The Commission’s latest case in this area focuses on an adviser who disregarded his fiduciary obligation in favor of improperly increasing the fees charged. In the Matter of Stephen Brandon Anderson, File No. 3-19183 (May 28, 2019). Mr. Anderson is the owner and CCO of River Source Wealth Management LLC, a registered investment adviser until March 2017. The then filed a Form ADV-W and terminated its registration. He is also the owner of Balsam Capital Group, LLC, a firm used to market the adviser.
River Source’s revenue came largely from fees charged advisory clients. Those fees were tied to AMU for each client. The maximum fee for each client was listed on a fee schedule attached to the Investment Advisory Agreement executed by Respondent and the client.
Two fee increases were implemented during the 2012 – 2015 time period. The first was in September 2012. Mr. Anderson sent a letter to River Source firm client stating that the maximum annual fee would be increased from 1.0% to 1.25% for clients with less than $1 million in assets under management – most of the firm clients. The increase was disclosed in Form ADV Part 2A, dated March 17, 2015.
The second fee increase was in December 2015. Mr. Anderson sent a letter notifying clients that the maximum fee would be increased from 1.25% to 1.5%, effective January 1, 2016. This time the fee change was not reported in the Adviser’s filings.
Each representation regarding a fee increase was incorrect. In 2015 River Source charged most clients an advisory fee that exceeded the 1.25% stated in Respondent’s letter. In total the adviser received about $650,000 in advisory fees for 2015, of which $185,816 were overcharges. In 2016 the majority of the firm clients paid fees that exceeded the 1.5% specified in the Anderson letter to the clients. In that year River Source received about $640,000 in advisory fees of which $181,360 were overcharges.
The advisor also failed to properly calculate AMU, disclose material events, keep the required books and records and implement a reasonable compliance system. First, in 2015 AMU was reported as $227.2, an overstatement of about $34 million. In 2016 AMU was reported as $235.6 million, an overstatement of at least $61 million. Second, the Form ADVs for 2015 and 2016 also failed to disclose that two law suits had been filed against Mr. Anderson and River Source by clients, alleging breach of fiduciary duty, fraud, negligence, reckless supervision and unjust enrichment. In 2017 the Adviser incorrectly told investors that it chose to change the custody arrangement when in fact the custodian terminated it after discovering the overcharges.
Third, the Adviser failed to keep the required books and records. For example, the adviser did not to maintain and produce to the Commission books and records regarding cash receipts and similar matters, communications regarding the performance or rate of return for managed accounts, records sufficient to demonstrate the calculation of the performance or rate of return for all managed accounts and records from which the current position of each client could be readily ascertained. Finally, the adviser failed to adopt and implement reasonably designed compliance policies. The Order alleges violations of Advisors Act Sections 204, 206(2) and 207.
In connection with the resolution of these proceedings Respondent agreed to implement certain undertaking which include: Notifying clients of these proceedings, posting the Order in these proceedings for two years on the firm’s home page and certifying compliance.
Respondent also consented to the entry of a cease and desist order based on the Sections cited in the Order and to a censure. In addition, Respondent is precluded from acting in a supervisory or compliance capacity in the securities business but may apply to do so again after three years. Respondent will pay disgorgement of $367,176, prejudgment interest of $38,205 and a penalty of $100,000.
FCPA Institute: On June 21 and 22, 2019, Professor Mike Koehler will conduct the FCPA Institute at the Offices of Dorsey & Whitney LLP in Minneapolis, Minnesota. The Institute provides a unique learning experience for those seeking to elevate their knowledge of the Foreign Corrupt Practices Act. Professor Koehler is one of the foremost scholars on the FCPA and conducts an interesting and most informative program. The program is live in Minneapolis and also webcast. You can obtain more information about the program and register here.