The Securities and Exchange Commission (“SEC”) recently issued sanctions and cease and desist orders against Marco Investment Management, LLC (“MIM”) for a number of violations of the Investment Advisers Act of 1940, as amended (the “Advisers Act”), which were the result of MIM calculating advisory fees for certain clients with margin accounts in a manner that was “different from and, at times, in excess of that provided for within those clients’ respective written advisory agreements.”
In their order, the SEC outlined that MIM had written agreements with its clients reflecting the firm would charge annual advisory fees that would be calculated and billed quarterly based on “[t]he market value of all gross assets in [the client’s account] … as of the close of trading on the last business day of each calendar quarter….”. Certain MIM clients had margin agreements with brokerage/custodian firms covering their managed assets. The margin agreements stated that any sale proceeds and other account credits would be credited to the margin balance to reduce the debt and reported accordingly on the custodian account statements. However, according to the SEC, for approximately 25 clients with margin accounts MIM calculated its quarterly advisory fees before accounting for the reduction that had been applied by the custodian, which MIM had stated was the result of verbal agreements the firm had in place with such clients. Since the billing practice was inconsistent with the language in those clients’ advisory agreements with MIM, and the firm was unable to produce any written documents to reflect the changed billing arrangement, the SEC concluded that MIM had overcharged those clients. Additionally, the SEC believed that since MIM’s portfolio accounting system reflected the higher margin balances, the firm had reported incorrect inflated account values to the 25 clients and also misstated its regulatory assets under management on its Form ADV.
The Advisers Act violations noted by the SEC included:
- Section 206(4) and Rule 206(4)-7 for not having applicable policies and procedures and not reviewing them annually to ensure adequacy
- Section 204(a) and Rule 204-2(a) for not having appropriate required books and records
- Section 207 for making untrue statement of material fact in Form ADV
Without admitting or denying the findings, MIM agreed to the sanctions levied by the SEC, which included among other things a disgorgement of profits, a monetary penalty, and the hiring of an independent compliance consultant for at least a three year period to perform “regular comprehensive reviews” of MIM’s compliance program.
Billing practices continues to be a high focus for regulators during exams, along with calculation and reporting of regulatory assets under management. It’s important for investment advisory firms to ensure they have detailed policies, procedures and internal controls in place surrounding these areas and that such are in line with applicable regulations, current processes, and disclosures.
For information on how Core Compliance & Legal Services, Inc. can assist firms with drafting policies, procedures and disclosures, along with more information on this enforcement action and other related subjects, please contact us at (619) 278-0020.