"Hicks and his firms kept their clients in the dark about this and other conflicts of interest that investors are entitled to know about and advisers must disclose," Bruce Karpati, chief of the SEC Enforcement Division's Asset Management Unit, said in a statement. "Payments to investment advisers for recommending certain types of investments may corrupt their ability to provide impartial advice to their clients."
Hicks, Focus Point, and The H Group agreed to pay the $1.1 million without admitting or denying guilt.
Hicks and his firms have taken all the steps requested by the SEC to address these concerns, according to a lawyer for the adviser, John Carr from Lake Oswego, OR-based Carr Butterfield.
"From our client's perspective, there was no investor harm as a result of the inadequate disclosures," Carr says. "Also, the enhanced disclosures were implemented months ago in the ADV documents."
The SEC investigation found violations in three areas of the advisory business run by Hicks, who owns Focus Point Solutions and The H Group, according to the commission. Most notably, Focus Point did not disclose to customers that it was receiving revenue-sharing payments from a brokerage firm that managed a particular category of mutual funds being recommended to Focus Point clients, according to the SEC.
Because Focus Point received a percentage of every dollar that its clients invested in these mutual funds, there was an incentive to recommend these funds over other investment opportunities in order to generate additional revenue for the firm, the SEC said.
The SEC said that there were two additional ways that Hicks and his firms failed to disclose conflicts of interest while seeking approval to have Focus Point added as the sub-adviser to a mutual fund called the Generations Multi-Strategy Fund. According to the SEC:
- While seeking required approval from the fund's trustees, Focus Point misrepresented that it would receive no payments other than fees paid under the sub-advisory contract. However, unbeknownst to the trustees, the fund's primary adviser had a separate payment arrangement with Focus Point. Therefore, Focus Point was required to disclose that payment arrangement to the fund's trustees.
- Focus Point's request to be retained as sub-adviser to Generations also required the approval of Generations' shareholders, the vast majority of whom were clients of The H Group. Thus, The H Group had a potential conflict of interest as a related entity to Focus Point, which stood to reap additional fees from the mutual fund that The H Group recommended to many of its clients. Therefore, The H Group's proxy voting policy required the proxies to be voted by the investors themselves. Instead, The H Group itself voted its clients' proxies in favor of the proposal to add Focus Point as a sub-adviser.
The Asset Management Unit and the SEC's San Francisco Regional Office have begun an initiative to shed more light on revenue-sharing arrangements between investment advisers and brokers, according to the commission.
"Today's action is the first case to come from the initiative developed by the Asset Management Unit and San Francisco Regional Office to ferret out undisclosed revenue sharing arrangements between investment advisers and brokers," says Marshall Sprung, deputy chief of the SEC Enforcement Division's Asset Management Unit.