RIAs Must Make Good on Fee Refunds and Fully Disclose Their Financial Condition

On July 20, 2018, the SEC announced the settlement of charges against a Beverly Hills-based Registered Investment Adviser (RIA) and its majority owner, because the firm improperly refused to refund unearned advisory fees to 63 clients who left the firm. The RIA also made material misstatements in written disclosures to clients regarding the firm’s financial condition.

According to the SEC’s order instituting administrative and cease-and-desist proceedings, the RIA and its owner withheld $131,000 in prepaid unearned advisory fees. The 63 former clients used email to request that the RIA terminate their advisory relationship. The RIA and its owner refused at first to recognize the requests as a proper termination notice and insisted on “wet signatures.” However, the RIA’s policies and procedures, as well as its written disclosures and advisory agreements, permitted clients to use email to terminate their relationship with the firm. An original signature was not required to sever the advisory relationship. It took many months for the RIA to refund all of the unearned advisory fees, even though examiners had raised the issue with the firm and the SEC’s enforcement staff had requested documents.

The SEC’s order also alleged that the RIA and its owner omitted material facts and made false and misleading statements to clients regarding the firm’s financial condition. The RIA failed to disclose that it was insolvent and financially unable to repay $700,000 in loans it had taken out to keep the business afloat. Despite these financial circumstances, the firm’s disclosure brochure claimed that the RIA did not have a financial condition or commitment that impaired its ability to meet contractual and fiduciary obligations owed to clients.

The SEC’s order found that the RIA and its owner willfully violated the Investment Advisers Act and its rules. Without admitting or denying the Commission’s findings, the RIA and its owner consented to cease-and-desist orders, censures, and civil penalties of $100,000 and $50,000 respectively. The RIA was also ordered to correct its Form ADV, Part 2A disclosure brochure.
The SEC’s order can be found HERE.

Ara Jabrayan is the Managing Member of RIA Compliance Group, LLC, and on the Advisory Board for SmartRIA. His specialties include SEC and state RIA registrations, ongoing compliance assistance, mock exams, and the development of compliance programs. Follow him on LinkedIn, Facebook, or check out his Blog.