Total Wealth Management became one of the whipping boys for the Securities and Exchange Commission when it started its focus on private fund fees last year. The firm settled with the SEC and agreed to pay the fine. But the firm exacerbated the problem by allegedly misappropriating the money from its clients.
Last year, the SEC accused Total Wealth of wrongfully taking revenue sharing fees. It’s not that the fees themselves are wrong, but they must be disclosed and the some effort made to make sure that clients are put ahead of the revenue sharing. Total Wealth apparently failed on both counts.
The SEC accused Total Wealth of not disclosing the revenue sharing. According to the complaint, the revenue sharing severely distorted the firm’s behavior. About 92% of Total Wealth’s fund assets were invested in entities that had revenue sharing arrangements.
Total Wealth agreed to settle the charges and put $150,000 into escrow in advance of the SEC’s consideration of the order. The firm did so.
[Face to Palm]
The firm “borrowed” the $150,000 from the fund it managed.
[Head shake.]
Clearly, Jacob Cooper, the head of Total Wealth has little appreciation for conflicts of interest. There is no instance in which a loan to the fund manager is in the best interest of the fund. There is no may that the principals themselves can be the ones to make that decision because the decision-making itself is a conflict of interest.
The loan also shows that there is a lack of internal controls that prohibit the misuse of client funds.
I, and many others, thought the SEC was off-base when it brought charges against Total Wealth and headlined the action on the use of “may” instead of “will”. The firm had said in its documents that it may enter into revenue sharing arrangement. The SEC though this was a disclosure fail because the firm had actually entered into those arrangements.
I still think it was a reach by the SEC to carry that headline. But clearly, there are issues at Total Wealth and it appears it was right of the SEC to try to bring the firm in line.
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