Is Your Investment Advisor Really “Conflict-Free”?
Investment advisors have a legal obligation to disclose any conflicts of interest which may affect their clients’ accounts. All registered investment advisors must file a disclosure statement, known as Form ADV, with the SEC and state regulators describing any brochures or other solicitations used to attract clients. Form ADV must include any statements regarding the investment advisor’s conflicts of interest or lack thereof.
Montford and Company, Inc. v. SEC
When companies mislead investors on their Form ADV, the SEC may take action. Here is a recent example. The U.S. Court of Appeals for the District of Columbia Circuit recently affirmed an SEC order against an investment advisor who failed to disclose a material conflict of interest to its clients. The D.C. Circuit’s decision actually dealt with the SEC’s legal process in enforcing its rules and the severity of its punishment, rather than the substance of the investment advisor’s violation, but the case still provides a useful illustration of what regulators look for in conflict of interest situations.
Montford Associates is a registered investment advisor whose clients are primarily institutional investors, such as pension funds and non-profit organizations. Montford does not engage in any securities trading on its clients’ behalf. Instead it recommends investment managers to handle their portfolios; Montford then provides ongoing monitoring of the manager’s performance.
In its Form ADV and related advertising materials, Montford promoted itself as an “independent” and “conflict-free” investment advisor, meaning it did not receive fees or commissions from any manager or investment it recommended to a client. Montford further stated it would disclose “all matters that reasonably could be expected to impair” its ability to offer “unbiased and objective” advice to its clients. Montford’s executives made additional public statements in support of this view.
But as the SEC later discovered, Montford’s advice was not completely “conflict-free.” In 2009, Stanley Kowalewski, an investment manager, agreed to pay Montford for “consulting services,” which was a euphemism for Montford convincing its clients to transfer their accounts from Kowalewski’s previous employer to his new company. Kowalewski ultimately paid Montford over $200,000. At least nine Montford clients subsequently invested with Kowalewski’s firm. A federal grand jury indicted Kowalewski in 2013 for allegedly defrauding his hedge fund clients out of nearly $8 million and obstructing the SEC’s efforts to investigate him.
In September 2011, the SEC charged Montford with violating the Investment Advisors Act. The SEC issued its final decision and order against Montford in 2014, which the company then unsuccessfully appealed to the D.C. Circuit. The SEC barred Montford from the securities industry and ordered the company and its founded to pay a combined $650,000, in addition to disgorgement of the illicit fees paid by Kowalewski.
Are You Receiving “Independent” Advice?
Before retaining anyone claiming to be an “independent” or “conflict-free” investment advisor, you should always check out their Form ADV filings, which are publicly available from the SEC and state securities regulators. You should also do your own due diligence, questioning the investment advisor’s experience and making sure they have not run afoul of securities regulators in the past. And if you have been the victim of an investment advisor who failed to disclose a material conflict, you should seek out advice from a qualified Florida securities fraud attorney. Contact Gregory Tendrich, P.A., in Boca Raton if you would like to speak with an attorney right away.