The Securities and Exchange Commission on Tuesday charged a Houston-based investment adviser with fraud for not disclosing to clients that it was receiving compensation from a broker for investing their money in mutual funds recommended by that broker.
The SEC found that the Robare Group Ltd. in 2004 entered into an agreement with an unnamed broker-dealer in which the broker would pay Robare between two and 12 basis points on the client assets that the adviser invested in no-transaction-fee mutual funds on the broker's platform.
The SEC said that between September 2005 and September 2013, Robare received approximately $441,000 in fees from the broker. Robare, a registered investment adviser in Houston that provides services for 350 separately managed accounts with approximately $150 million in assets under management, uses the broker for execution, custody and clearing services for its clients.
The revenue arrangement gave Robare's co-owners, Mark L. Robare and Jack L. Jones Jr., an incentive to recommend the broker's mutual funds rather than other investments that might have been better for their clients, the SEC alleges.
The SEC also said that from 2005 until December 2011, Robare failed to disclose the revenue agreement on its form ADV.
“Clients were thus unaware that Robare Group might have a bias in favor of NTF mutual funds on the broker's platform over other investments that would not generate revenue for the Robare Group under the servicing fee deal with the broker, leading to potentially conflicted investment advice,” the SEC
states in its complaint.
Beginning in December 2011, Robare began to disclose the fee arrangement but did not go far enough, according to the SEC. It did not indicate, for instance, that the arrangement created a conflict of interest, and it also stated that Robare “may receive compensation” from the broker when it was receiving the payments.
Alan Wolper, an attorney at Ulmer & Berne representing Robare Group, denied the SEC's charges and suggested that the agency would not be able to meet its burden of proof before an administrative law judge.
“We intend to defend these allegations vigorously…[and] look forward, ultimately, to prevailing,” Mr. Wolper wrote in an e-mail.
The SEC's Asset Management Unit in its Division of Enforcement has targeted undisclosed compensation agreements between investment advisers and brokers. In September 2012, it
charged an Oregon-based adviser with failing to disclose revenue-sharing arrangements.
“Payments to investment advisers for recommending certain types of investments may taint their ability to provide impartial advice to their clients,” Marshall S. Sprung, co-chief of the SEC asset management unit, said in a statement.
