SEC Sanctions Adviser For Not Fully Disclosing Fee Arrangements
The Commission has brought a series of cases focused on undisclosed conflicts of regulated entities. A number of those cases centered on undisclosed fee and compensation arrangements. In its most recent case the agency went one step further, charging an investment adviser with fraud who disclosed the terms of its compensation arrangements, told clients they could present a conflict but did not inform them that in certain instances its compensation could be increased because the agreements overlapped. In the Matter of Dion Money Management, LLC, Adm. Proc. File No. 3-16702 (July 24, 2015).
Dion Money Management is a registered investment adviser. Its clients traditionally were high net worth individuals, family businesses and corporations. Client asserts were held in separately managed discretionary accounts.
The firm’s approach, evolved over time, was to construct model portfolios of mutual funds for client accounts. Clients could, and often did, elect to depart from the exact holdings of the model portfolios. In those instances the adviser would construct individualized client portfolios. While clients were free to select a custodian, Dion Money Management recommended two that were SEC registered broker-dealers. Most clients used Broker A.
Beginning in 2002 the adviser entered into service agreements over time with an administrator to a Family of Funds B, a distributor for Family of Funds C and a Custodial Support Agreement with Broker A. With Family of Funds B the adviser had an arrangement under which it was paid a fee based on the amount of client assets invested in select funds in exchange for providing recordkeeping and administration services for those clients. After a number of modifications, in 2005 the adviser received a payment of 20 basis points up to certain limits. With Fund Family C the adviser entered into a similar arrangement, although the payment rate was 30 basis points. Under the arrangement with Broker A the adviser was compensated on a quarterly basis based on the percentage of client assets held in custody with the Broker that were invested in certain mutual funds on the brokers no-transaction–fee platform. That did not include Fund Family A but did include Fund Family B and Fund Family C.
Dion Money Management made certain disclosures regarding the arrangements listed above in its Form ADV. Specifically, in those Forms for 2011, 2012 and 2013 the firm stated that it had entered into aervice agreements with some mutual funds in which firm clients invested. Under those agreement, the Form ADV stated, the adviser was paid a fee for providing shareholder service that may be up to 30 basis points. The Forms identified the parties to the arrangements and went on to state that “[a]s a result of these fees, Dion Money Management, LLC has an incentive to invest client assets in the mutual funds for which . . . [it] receives additional compensation . . .”
The Form ADV statement regarding payments up to 30 basis points “was not complete . . . [the adviser] did not disclose that, in certain instances,. . . [it] could – and did – receive payments at a rate greater than 0.30% [30 basis points] . . .” according to the Order. The adviser also did not disclose that in certain instances it could and did “receive payments based on the same client assets from Broker A. . . [under the Custodial Agreement] as well as either . . .” Fund Family B or Fund Family C, the Order charged. Stated differently, the adviser did not disclose the possibility of “payments from multiple sources based on the same client assets, or the aggregate possible rate of such payments . . .” Through 2011 and 2012 about 50-55% of the advisory client assets were invested in mutual funds with Fund Family B and Fund Family C.
The Order alleges violations of Advisers Act Section 206(2) and 207.
Dion Money Management resolved the charges, settling the proceeding. The firm will implement a series of undertakings which include amending the provisions of its current Form ADV, providing notice to clients of the Order and certifying compliance. The adviser also consented to the entry of a cease and desist order based on the Sections cited in the Order and to a censure. It will pay a civil money payment of $50,000. Disgorgement was not ordered.