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 advisors and broker/dealers.
TD Waterhouse agreed to pay $2 million in a settlement over charges that it made undisclosed cash payments to three registered investment advisors to win their brokerage business. Two of the advisors 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. "We're hoping that by fining TD Waterhouse a large amount, the Commission sends a message that brokerage firms that seek to attract investment advisor 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 advisors, and they have fiduciary responsibilities to their clients, so they have to decide independently what custodian is best for their clients. If the advisor doesn't disclose this [kind of arrangement] to its client, it's 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 its RIAs made the proper disclosures. But, according to the SEC, it failed to follow through.
Analysts said these kinds of cash payments to RIAs are very common, particularly because competition for advisor business between the three biggest custodians -- Charles Schwab, Fidelity Investments and TD Waterhouse -- is so fierce. "It's pretty widespread," said Matthew Bienfang, an analyst with TowerGroup. Bienfang said he thinks the settlement will raise some questions for advisors and their clients, but he doesn't expect any of the clearing firms to stop making those payments. "That's not at issue, it's just the disclosure," 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 boilerplate disclosure."