August 30, 1993
TO: COMPLIANCE COMMITTEE NO. 19-93
INVESTMENT ADVISER ASSOCIATE MEMBERS NO. 32-93
INVESTMENT ADVISER MEMBERS NO. 44-93
RE: SEC SANCTIONS INVESTMENT ADVISER FOR UNDISCLOSED
COMPENSATION ARRANGEMENTS
__________________________________________________________
The Securities and Exchange Commission recently sanctioned a registered
investment adviser for violations of the Investment Advisers Act in connection
with undisclosed compensation arrangements between the adviser and a broker.
The Commission found that a life insurance company affiliated with the
adviser entered into compensation arrangements with a broker who was widely
regarded as an expert on public employee retirement board investments. Under
these arrangements the broker consulted the adviser on the public pension market,
introduced the adviser to the broker’s retirement board clients, and recommended
to those clients the adviser’s investment advisory services and the life
insurance company’s group annuity contracts. The life insurance company paid
approximately $1 million to the broker in consulting fees and approximately
$800,000 to insurance agencies designated by the broker.
The Commission found that the adviser failed to disclose to investors the
fees paid to the broker. At various times according to the Commission, members
of retirement boards asked whether there was any economic relationship between
the adviser and the broker. Employees of either the adviser or its affiliates
gave inaccurate or incomplete responses, which were not corrected by the
employees’ superiors or by inside counsel. The Commission found that the adviser
thus violated Sections 206(2) and (4) of the Investment Advisers Act and Rule
206(4)-3 thereunder (the "cash solicitation" rule).
The Commission also found that while Part II of the adviser’s Form ADV
generally indicated that the adviser had referral arrangements, it did not
disclose the arrangements with the broker in particular. The Commission found
that the adviser thus violated Sections 204 and 207 of the Investment Advisers
Act and Rules 204-1 and 204-3 thereunder.
Finally, the Commission found that a broker-dealer affiliated with the
adviser offered and sold one of the life insurance company’s securities products
without disclosing the compensation arrangement to investors. The Commission
found that the broker-dealer violated Sections 17(a)(2) and (3) of the Securities
Act and that the adviser was a cause of those violations.
Without admitting or denying the allegations, the adviser consented to a
penalty of $500,000 and an order that it cease and desist from violating Sections
204, 206(2), 206(4), and 207 of the Investment Advisers Act, Rules 204-1, 204-3,
and 206(4)-3 thereunder, and Sections 17(a)(2) and(3) of the Securities Act.
Without admitting or denying the allegations, the affiliated broker-dealer
consented to an order that it cease and desist from violating Sections 17(a)(2)
and (3) of the Securities Act.
Attached is a copy of the Commission’s order.
Thomas M. Selman
Assistant Counsel
Attachment