New conflict of interest concerns: SEC fines RIAs for BD loans

In moves with potentially industrywide repercussions, the Securities and Exchange Commission has meted out over $100,000 in fines to two RIAs for failing to disclose nearly $5 million in loans from its broker dealer to clients.

Washington Wealth Management, now known as Kestra Private Wealth Services, was fined and censured $50,000 by the SEC for failing to disclose $1.8 million in loans from its broker-dealer to clients.

An SEC investigation also found that Advantage Investment Management failed to disclose that it had received more than $3 million in revenue in the form of a forgivable loan made in 2012 by a broker-dealer.

The firm was censured and fined $60,000. AIM did not admit or deny the SEC’s findings, but consented to the entry of the SEC’s order censuring it, and requiring it to cease and desist from further violations.

The broker-dealers who made the loans to the two firms were not named in the SEC action, but both firms were affiliated with LPL Financial when the loans were made in 2012 and 2013.


“Most advisors probably hadn’t considered forgivable loans from the clearing broker as undisclosed revenue giving rise to a conflict of interest similar to revenue sharing,” the consulting firm Cipperman Compliance Services said in an email about the actions. “They should now.”

Washington Wealth “did not disclose the existence, nature, or magnitude of the loans from the Broker-Dealer to its clients, either in its Form ADV filed with the commission or otherwise, until Oct. 16, 2013, almost a full year after it first received a forgivable loan from the Broker-Dealer,” according to the SEC action.

The loans constituted a conflict of interest because the BD required Washington Wealth to use its services and to keep client assets with the BD, according to the commission.

Washington Wealth, now Kestra, settled the matter with the SEC without admitting or denying guilt. “We fully cooperated with the SEC’s inquiry and are pleased to have the matter resolved,” says Kestra Chief Executive Rob Bartenstein.

Advantage Investment Management entered into an agreement with a third-party broker-dealer in August 2012 under which the broker-dealer would become AIM’s new primary broker-dealer, and would provide trade execution, custody, and reporting services for AIM’s clients, the SEC said.

In connection with the agreement, “the broker-dealer issued a loan in excess of $3 million, forgivable over a five-year period,” according to the SEC. AIM also “failed to disclose to its clients and in its Form ADV its receipt of revenue from the broker-dealer and the conflicts of interest created by its agreement with the broker-dealer, in breach of its fiduciary duties,” the SEC investigation found.


Washington Wealth left LPL for NFP Advisor Services in early 2014. Earlier this year, the firm changed its name to Kestra Private Wealth Services and NFP Advisor Services Holdings changed its name to Kestra Financial.

Former Washington Wealth president John Simmons, now a consultant in Salt Lake City, said the commission is acting like a bully in bringing the action. The commission began its inquiry into the matter while he was still with the firm, Simmons says.

Given that wirehouses are not required to make such disclosures about upfront money, Simmons says, “Washington Wealth’s stance is, ‘Why are you forcing us to do that?'”


But securities lawyer Leonard Steiner of Beverly Hills, Calif. says that investors need such disclosures from firms to fully understand the motives that drive them.

“An Investment advisor is supposed to give conflict-free advice,” Steiner says. “Here it appears … that a brokerage firm gave the investment adviser money in the form of a forgivable note. It was for keeping a certain amount of money at the BD and for putting order flows through the BD, so if the firm doesn’t disclose that to the customer, the customer is being harmed because the customer is not getting advice that isn’t tainted by a conflict of interest.”

In essence, the transaction amounted to a payment over time disguised as a loan, Steiner says.

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