Corporate Counsel Daily, Adviser settles charges of failing to disclose conflicts of interest, (May 21, 2024)
An investment adviser failed to fully disclose that it recommended investments that compensated an affiliated broker-dealer.
The SEC settled charges against an investment adviser who failed to disclose conflicts of interest. The Commission's order found that the adviser recommended investments that paid a commission to the adviser's affiliated broker but failed to adequately disclose this conflict of interest. The adviser also failed to adopt written policies and procedures that would have prevented these violations. To settle the charges, the respondent agreed, among other sanctions, to pay over $1 million in disgorgement, interest, and penalties (Raymond Lawrence Lent, Exchange Act Release No. 34-100183 (May 20, 2024)).
The respondent, Raymond Lawrence Lent (dba The Putney Financial Group, Registered Investment Advisors) was an investment adviser operating as a California sole proprietorship. Putney was a registered adviser from 2004 until 2022, when it changed its name and form of organization to the Putney Financial Group, LLC. Lent was the sole proprietor of Putney and is now the managing member of Putney, LLC. Lent is also the co-owner and Chairman of the Board of Portsmouth Financial Services.
Variable annuity investments. The Commission found that Putney recommended its clients purchase certain variable annuity investments sponsored by insurance companies. These companies paid Portsmouth an upfront commission of approximately 6.8% of the total invested in each of the contracts. Portsmouth then paid Lent, as a registered representative of Portsmouth, about 92% of that upfront commission. In many cases, there were fee-based variable annuities available to the clients that did not pay sales commissions and that had lower fees.
In addition, Portsmouth's agreement with its clearing broker provided that the broker would share a portion of the revenue the broker received in connection with money market funds selected for cash sweep accounts. During the period at issue, Putney selected money market funds that paid revenue sharing to Portsmouth. The funds that paid revenue sharing also generally charged higher fees and at times returned lower investment yields to Putney's clients; other available funds paid no or lower revenue sharing, generally charged lower fees, and at times returned higher investment yields, the Commission said.
Failures to disclose. Between March 2016 and February 2019, Putney disclosed on its Forms ADV that Lent and other associates, in their capacity as registered representatives of Portsmouth, could receive compensation for the sale of certain investment products. But, during this time, Putney did not disclose that Portsmouth received these commissions or that they created a conflict of interest. Putney also failed to disclose that there were lower cost fee-based variable annuities issued by the same insurance companies with the same features that did not pay Portsmouth a commission. Putney also failed to disclose Portsmouth's revenue sharing from cash sweep products.
Violations. The Commission found that Putney willfully violated Advisers Act Sections 206(2) and 206(4) and Rule 206(4)-7. In addition to a cease-and-desist order and censure, Putney was ordered to pay disgorgement of $707,129.58, prejudgment interest of $183,236.60, and a $175,000 civil penalty. Putney also agreed to undertake to review and correct its disclosure documents and to evaluate whether clients should be moved into lower-cost products.
The release is No. 34-100183.
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