SEC and Retail Customers: Sanctions For Undisclosed Principal Transactions

The Commission’s revamped approach to enforcement, centered in part on retail customers, is reflected in its most recent case. In an action against a managing director at a firm registered as an investment adviser and broker dealer, the Order focuses on numerous principal trades made without disclosure or consent. In the Matter of John Tarpinian, Adm. Proc. File No. 3-18337 (Jan. 17, 2018).

Respondent John Tarpinian was a Managing Director of Newport Coast Securities, Inc. The firm is a registered representative and a registered investment adviser. Respondent provided advice on the value, purchase and sale of securities to over one hundred advisory clients. In return the firm was paid an advisory fee from each client based on the assets under management.

Mr. Tarpinian used a brokerage proprietary account the Order calls “Principal Account.” Over an almost two year period beginning in March 2013 Mr. Tarpinian placed about 2,785 trades between the Principal Account and advisory client accounts. Those included instances in which he bought or sold securities on behalf of his clients directly with the Principal Account.

In most instances the brokerage arm of the firm collected at least 25 basis points per unit bought or sold. The required written disclosures were not made in conjunction with these transactions. Likewise, the required consents from the clients were not obtained. In some instances the clients were advised of the situation after the fact but not the additional fee. About $50,000 in additional fees was “obtained” by Respondent from the transactions, according to the Order. The Order alleges violations of Advisers Act Section 206(3).

To resolve the matter, Respondent consented to the entry of a cease and desist order based on the Section cited in the Order and to a censure. Respondent will also pay disgorgement of $50,000, prejudgment interest of $3,652.09 and a penalty of $25,000.

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