SEC Fines Wisconsin RIA for Failing to Disclose Fee Conflicts
Harbour Investments, a Madison, Wisconsin hybrid advisory and independent brokerage firm, has reached a $241,479 settlement with the Securities and Exchange Commission for failing to disclose to advisory clients a variety of conflicts it had in steering them into certain mutual funds and a custodian with which it had a marketing agreement.
The settlement, disclosed in a cease-and-desist and sanctions order the SEC filed on Thursday, highlights the importance the regulator gives to disclosure on RIA’s ADV forms sent to clients and regulators of all compensation received from third parties and of how the conflicts are addressed.
Harbour, whose advisory arm manages $1.5 billion for approximately 5,800 retail customers, failed to disclose from 2012 to 2016 that one of its custodians was paying it two basis points on the value of assets clients kept with the outside firm. The SEC did not name the outside custodian, but Harbour’s March 2018 investment advisory brochure said Pershing Advisor Solutions (PAS) pays it a fee as part of a marketing arrangement.
The SEC, which said Harbour recommends five custodians to customers “in an attempt to provide various choices to its clients and representatives,” noted that the Pershing agreement “created an incentive for Harbour to recommend Custodian A over its other custodians.” The firm’s latest brochure notes: “Clients are advised that they are not required to use PAS and that other custodians are available who do not pay Harbour any marketing fee, but who provide services similar to PAS.”
The regulator also said the firm failed to fully disclose that it had invested some advisory clients in Class A mutual fund shares that paid 12b-1 marketing fees to the firm and advisors when lower-cost share classes of the same fund were available. In addition to violating disclosure rules, the activity was inconsistent with the RIA’s duty to seek best execution, the SEC said.
Harbour agreed to pay $241,479 for its violations, including a civil penalty of $75,000 and the rest in disgorgement and interest. The money will be put into a “Fair Fund” meant for distribution to advisory clients who paid unnecessary 12b-1 fees.
Neither Harbour President Nick Sondel nor Chief Compliance Officer Richard O’Leary returned requests for comments left on their voicemails. The firm’s voicemail system identifies it as “a broker-dealer and RIA with Midwest values, independently owned.”
Harbour employs about 167 independent investment adviser representatives, many of whom also are part of the firm’s force of 214 brokers in 100 U.S. offices, according to the consent order.
The SEC, which also charged Harbour with failing to implement policies and procedures designed to manage its conflicts, said it considered the “remedial acts promptly undertaken” by the firm and its cooperation with regulators in determining the sanctions.
Harbour, which has been an RIA since 1987, accepted the order without admitting or denying the findings.