In a year filled with securities industry scandals and settlements, the Securities and Exchange Commission has uncovered a new source of potential conflicts of interest. It could be yet another reason to expand the already overwhelming number of disclosures required of investment advisers and broker/dealers.
TD Waterhouse agreed to pay $2 million this week in a settlement over charges that it made undisclosed cash payments to three registered investment advisers to win their brokerage business. Two of the advisers implicated also agreed to settle. Both Kiely Financial, based in Greenville, N.C., and Rudney Associates of San Ramon, Calif., agreed to disgorge the money they received from TD Waterhouse, to pay civil penalties and to stop accepting undisclosed cash payments.
The SEC said it hoped the settlement would serve as a warning to the rest of the industry. "Were hoping that by fining TD Waterhouse a large amount, the Commission sends a message that brokerage firms who seek to attract investment adviser business have to be very careful in how they do it," said Sahil Desai, staff attorney for enforcement at the SEC. "These are independent investment advisers, and they have fiduciary responsibilities to their clients, so they have to decide independently what custodian is best for their clients. If the adviser doesnt disclose this [kind of arrangement] to his client, its money under the table," he said.
Recognizing the potential conflict of interest inherent in the cash payment arrangements, TD Waterhouse had adopted written procedures to ensure that advisers made the proper disclosures. But, according to the SEC, it failed to follow through. "Although independent advisers are required by law to make the necessary disclosures, we regret that our oversight of those disclosures was not consistent with our own written procedure in these cases," said a TD Waterhouse spokeswoman. "We have enhanced our internal controls, and continue to offer education resources to help advisers understand their disclosure obligations," she said.
Analysts said these kinds of cash payments to RIAs are very common, particularly because competition for adviser business between the three biggest custodians Charles Schwab, Fidelity and TD Waterhouse is so fierce. "Its pretty widespread," said Matthew Bienfang, an analyst with Tower Group. Bienfang said he thinks the settlement will raise some questions for advisers and their clients, but he doesnt expect any of the clearing firms to stop making those payments. "Thats not at issue, its just the disclosure around that," he said. "Initially, everyone will put together a statement that they will send to clients, make sure their account agreements have it in there going forward. Maybe the institutions will offer up some block or boiler-plate disclosure for advisers."