SEC Charges Adviser, Officers With Undisclosed Conflicts
The Commission has filed a series of actions tied to investment advisers who have failed to disclose conflicts of interest. The conflicts typically focus on the investment advise being furnished to the client. The most recent case involving undisclosed conflicts focuses on vendors furnishing investment related services. Those charges are bolstered by claims that misleading tax advice was furnished and the firm’s compliance procedures were inadequate. In the Matter of Devere USA, Inc., Adm. Proc. File No. 3-18527 (June 4, 2018).
deVere is a registered investment adviser whose business centers on U.K. pension holders. Specifically, its clients hold interests in U.K. pension plans. The adviser furnished advice to the clients regarding the transfer of their U.K. pension assets to overseas retirement plans that qualified under the U.K. tax authority’s regulations as a Qualifying Recognized Overseas Pension Scheme or QROPS.
Until about March 2017 deVere’s primary business involved recommending that clients elect to take a cash equivalent transfer value from their U.K. plan to a QROPS. The process typically involved the use of third party vendors in the form of a Custodian Firm and a Trustee Firm for the assets. The adviser would recommend, for example, the Custodian Firm. That firm charged a fixed annual fee each year, certain fixed charges for each transaction in the account and an establishment fee – a fee charged as a percentage of the assets each year for 10 years with an early cancellation penalty.
When the client transferred the assets to a Custodial Firm recommended by the adviser 7% of the transfer value was paid to an overseas affiliate of deVere. The firm paid half of that amount to the recommending investment adviser representative or IAR. Additional bonus payments were made to the adviser’s affiliate if certain targets were met. While the Custodial Firm paid the fees from its assets, the establishment fee was ultimately, over time, its basis. Clients were aware of the fees they were charged but were not informed about the payments to the adviser or the IAR or the resulting conflict.
The Trustee Firm also charged the clients for its services. Certain “introduction” and annual fees were paid to an overseas affiliate of the adviser with respect to clients who established and maintained QROPS with a Trustee Firm. The payments to the adviser’s affiliate were not disclosed.
Similarly, for clients who elected to convert all or a portion of their U.K. pension from British Pounds to U.S. Dollars or Euros in connection with the transfer to a QROPS, additional fees were paid to a Foreign Exchange Provider. As with the other recommended vendors, the Foreign Exchange Provider paid a portion of the fees to the IAR making the recommendation. That arrangement was not disclosed. To the contrary, the section of the Form ADV discussing the adviser’s compensation, while discussing fees, failed to disclose those from the Foreign Exchange Provider, the Trustee Firms or the Custodial Firms.
Tax advise was often given to clients by the IAR in connection with the transfer to a QROPS. Frequently, the statements made were incorrect. For example, certain IARs told clients between 2014 and 2016 that U.K. pensions were subject to U.K. inheritance tax. Yet that tax had not applied since at least 2011.
Finally, the adviser’s policies and procedures were not reasonably designed since they were not tailored to the specific business model of the firm. Specifically, “prior to at least December 2015 DVU [the adviser] did not have policies and procedures to address its QROPS business and the conflict of interest posed by the receipt of compensation from third parties . . .” in connection with that business, according to the Order. The Order alleges violations of Advisers Act sections 206(1), 206(2), 206(4) and 207.
To resolve the proceedings the adviser agreed to implement certain undertakings. Those included providing notice of these proceedings to the clients, certain training and the retention of an independent consultant to review the firm’s policies and procedures and make appropriate recommendations which will be adopted. In addition, the firm consented to the entry of a cease and desist order based on the sections cited in the Order and to the entry of a censure. The adviser will also pay a penalty of $8 million. See also SEC v. Alderson, Civil Action No. 1:18-cv-04930 (S.D.N.Y. Filed June 4, 2018)(action naming as defendants Benjamin Alderson and Bradley Hamilton, respectively, the CEO and Area Manager of the firm; complaint is based on the facts and sections cited above; case is in litigation).