The Importance of ADV Disclosures and Following Internal Controls

On October 29, 2012, the Securities and Exchange Commission (“SEC”) accepted an Offer of Settlement with Tilden Loucks & Woodnorth, LLC (“Tilden”) for the firm’s alleged violations of the Investment Advisers Act of 1940 for not seeking best execution for client’s securities transactions.  Tilden allegedly received undisclosed compensation by increasing commissions on client trades through their registered broker-dealer affiliate, LaSalle St. Securities, LLC (“LaSalle”). Tilden inaccurately told clients they would be receiving a discount on LaSalle’s commission rates when in reality the commission rates were increased.

The SEC claims that Tilden’s Form ADV inaccurately described its commission arrangements, which could lead the firm’s clients to misinterpret that due to Tilden’s affiliation with LaSalle,   they received discounts on trades.   Instead, clients were being charged $143 per trade, in which Tilden would give LaSalle an average of $37 per transaction and then pocket the difference. The SEC determined that this arrangement illustrated a material “undisclosed compensation” arrangement.

Moreover, within its internal control measures, Tilden developed a template of at least nine (9) best execution factors to compare LaSalle against two other broker-dealers. In use, however, Tilden failed to obtain any information from the other broker-dealers in order to make the comparison and effectively test best execution.  The SEC labeled Tilden’s inaction as an “incomplete review” of best execution of client trades with LaSalle.

The settlement called for Tilden to revise its Form ADV to provide enhanced disclosures about its compensation arrangements, provide its clients with the new brochure, and pay disgorgement of $170,319.94 and prejudgment interest of $16,531.18, which roughly equals the total compensation the firm received through its undisclosed compensation arrangement with LaSalle.

It is imperative for firms to ensure they have proper disclosures regarding conflicts of interest, including compensation arrangements, within their Form ADV, and to follow the internal controls that they develop.  For more information about this or any other regulatory compliance matter, please contact us at (619) 278-0020 to schedule a consultation.

Leave a Reply

Your email address will not be published. Required fields are marked *