The Robare case popped to my attention last year because the Securities and Exchange Commission was focused on the use of the word “may” instead of “will” as adequate disclose of a fee arrangement. My eyes rolled at such distinction. The administrative law judge felt the same way and dismissed the case. Now the Commission has heard the appeal of the case and found the adviser at fault.
According to the SEC charging order, The Robare Group would receive a fee for client funds invested in certain mutual funds. Of course, there is nothing inherently wrong with that arrangement as long as it is disclosed to clients. Obviously, the concern is that the adviser would direct clients to invest in those funds because it is good for the adviser, not necessarily because it is good for the client.
The original decision seemed centered around the SEC raising a fuss that Robare said in the Form ADV that is “may receive compensation from some mutual funds”. The SEC thought it should say “will” to highlight the conflict. The ALJ was not moved by this argument.
He also found that Robare was not negligent because it had engaged a compliance consultant to help with the disclosures. Surely this was a boon to compliance consultants.
The Commissioners overturned the ALJ. The ruling stayed away from the distinction between “may” and “will” by pointing out that the disclosure was inadequate to explain the fee sharing arrangement and how it may influence Robare to recommend one fund over another.
The disclosure mentioned individuals getting sales commissions. That was not accurate. Robare was paid based on the assets in certain funds.
The disclosure did not let clients know which funds generated the extra fee. A client would not be able to cast a skeptical eye on the arrangement of his or her portfolio. The case notes that there was no evidence that Robare’s clients were dispoportionally invested in funds that paid an extra fee to Robare.
The SEC seems moved that Fidelity reviewed the Robare Form ADV and did not find adequate disclosure and made the firm redo it.
In a blow to compliance consultants, the Commission did not allow Robare to escape a charge of negligence merely because it used a compliance consultant.
The ALJ found that Robare was not negligent in part because Robare relied on “experience and competent compliance consultants” to help ensure that it met the disclosure requirements. The Commission acknowledged that there is defense available at times for reliance on defense counsel. But there is not necessarily such a defense available for reliance on compliance consultants. Even if there were such a defense, the Commission felt than Robare did not demonstrate that the firm had met the equivalent standards.
Sources:
- SEC Loses Case Over the Word “May”
- The Robare Group, Ltd., et al. (Opinion of the Commission)
- Debevoise & Plimpton Discusses The SEC’s Robare Decision By Kenneth J. Berman, Robert B. Kaplan, Jonathan R. Tuttle and Bibiana C. Pesant
- In the Matter of The Robare Group Initial Decision (June 4, 2015)
- SEC ALJ dismisses action against small adviser over Form ADV disclosures in IA Watch
- Failing to Disclose Fees
