SEC Settles with Adviser for Failure to Disclose

Simon Riveles Disclosure, SEC

On September 6, 2012, the Securities and Exchange Commission (“SEC”) issued an Order imposing fines, penalties and disgorgement of more than $1.1 million on Focus Point, an investment adviser, and its affiliates for violations of the Investment Advisers Act and Investment Company Act. The Order indicates that the SEC intends to enforce its investment adviser regulations, particularly where undisclosed conflicts of interest exist between advisers and their clients.

Focus Point, a registered investment adviser based in Portland, Oregon with approximately $1.7 billion assets under management as of December 2011 was at the center of three major securities violations. Focus Point provides other investment advisers access to proprietary asset allocation models made up of mutual fund and ETF selections in a number of different asset classes, the majority of which related to “No Transaction Fee” (“NTF”) mutual funds.

One of Focus Point’s clients (“Broker”) contracted to pay Focus Point a fixed percentage of every dollar invested in NTF funds, complete with a scaling provision allowing Focus Point to increase its commission through increased investment in NTF funds. The SEC alleged that Focus Point violated the securities laws when it failed to disclose this arrangement and the resulting incentive to its other clients, and also when it failed to disclose the arrangement on its Form ADV.

The SEC also found that Focus Point violated a provision of the Investment Company Act by warranting that it would only receive payments or benefits from a certain mutual fund (“Fund”) through a sub-advisory agreement, despite an arrangement with a Focus Point-related adviser to receive 15 basis points. Focus Point’s withholding of information violated a provision that required it to furnish information necessary for trustees of the Fund to properly evaluate the terms of the sub-advisory contract.

Finally, the SEC found a violation of the Investment Adviser Act where H Group, an adviser that shares common ownership with Focus Point, voted Fund proxies to approve Focus Point’s sub-advisory relationship despite provisions in the proxy votes prohibiting exercise of proxy votes where a conflict of interests existed. H Group’s decision to vote the proxies in spite of the aforementioned arrangement was found to violate provisions of the Investment Advisers Act prohibiting advisers from defrauding, deceiving, or manipulating clients, and requiring effective policies to ensure that proxies are voted in a client’s best interests.

In addition to the more than $1 million owed to the U.S. Treasury, Focus Point and its affiliates will be forced to incur a few additional regulatory headaches. These include the hiring of a non-dischargeable independent compliance consultant to issue numerous mandatory reports, heightened recordkeeping requirements, and notice of the SEC Order to past and prospective clients over the next year.

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