BD Loans Raise Fines, Conflict of Interest Worries

The SEC recently took action that may be felt across the industry when it levied fines on two registered investment advisors this week. Kestra Private Wealth Services was censured for $50,000 for its failure to disclose $1.8 million in loans from its broker-dealer to its clients. According to the SEC, Kestra “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.”

Advantage Investment Management was also fined $60,000 for its failure to disclose that it had generated nearly $3 million in revenue from a forgivable loan that was made to it by its broker-dealer. AIM neither confirmed nor denied the SEC’s verdict, but has complied with the order. The SEC did not name either of the broker-dealers, but both of them were affiliates of LPL Financial when they received the loans in 2012 and 2013.

The consulting firm Cipperman Compliance Services wrote in an email to Financial Planning that “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. They should now.”

The fines were ultimately levied because the SEC views the loans as a conflict of interest for the firms. The conflict arose from the fact that the terms of the loan required Kestra and AIM to continue to use the broker-dealers and allow them to be the custodians for their clients’ assets. This means that the advisors had a vested interest to use those broker-dealers instead of other firms because of these loans.

Kestra chief executive Rob Bartenstein issued a statement saying, “We fully cooperated with the SEC’s inquiry and are pleased to have the matter resolved.” But these fines should be viewed as a warning by other advisory firms who may be doing the same thing.

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