An enforcement action from the Securities & Exchange Commission is a timely reminder to advisors to disclose any financial benefits their firm may receive from the broker-dealer it recommends to clients.
The SEC last month charged a Cincinnati advisory firm, Fry Hensley and Co., and its president, Nicholas Fry, with failing to disclose significant conflicts of interest from which it profited at its clients expense by way of payments from an unnamed Cincinnati broker-dealer who employed Frys wife, Jane, as a registered representative.
FHC, a registered investment advisor, received undisclosed compensation in the form of payments from inflated commissions, markups and markdowns charged to clients by the broker-dealer that FHC and Fry recommended that its clients use, the SEC said.
Fry traded for clients through one of the broker-dealers principal trading accounts, and often set transaction charges much higher than he could have, the SEC alleged in its administrative proceeding order issued last month. Whats more, Jane Fry received credit for 50% of the inflated transaction charges paid by FHCs clients between January 2007 and October 2011, totaling more than $775,669, according to the SEC.
Advisors should take the SEC action as a serious heads-up, said Todd Cipperman, principal of Cipperman Compliance Services.
A lot of independent he continued advisors like to use a particular broker-dealer, Cipperman said. They tell clients they dont really have use that broker, but they often say it in a way that implies the clients cant really work with them unless they do use the broker.
I think what the SEC is saying to advisers is, if youre going to use one broker, you better make dog-gone clear why youre recommending that particular broker, he continued. Advisors need to do a better job explaining why theyre doing what theyre doing.
FHC, which reported $32 million in assets under management for 52 clients accounts in its August 2012 ADV form, was otherwise insolvent and would have gone out of business if it had not used funds from the inflated transaction charges during that time, the SEC said.
FHC failed to tell their clients the essential facts about the arrangement with the broker-dealer, the SEC charged, and made false and misleading disclosures in documents given to clients and filed with the Commission. Jane Fry, who died in October 201, worked for the broker since 1990, and for 16 years, the SEC said, FHC maintained its office within the broker-dealers Cincinnati office.
For at least three years, according to the SEC, FHC and Fry answered no in response to a question on Part1 of Form ADV which asks Do you or any related person have discretionary authority to determine the commission rates to be paid to a broker or dealer for a clients transactions?
The SEC has ordered a public hearing and cease-and-desist proceedings to begin no later than May 8. FHC and Nicholas Fry did not respond to requests for comment.