Failure to Disclose Information Costs Firm $50,000

Recently, the Securities and Exchange Commission (“SEC”) issued a “cease-and-desist” order against Dion Money Management, LLC (“Dion”) for “failure to disclose to clients the terms of certain compensation arrangements whereby the adviser received payments from third parties that were calculated based on client assets invested in particular mutual funds [1].”

Between May 2002 and July 2007, Dion entered into servicing agreements with certain third parties, including a mutual fund investment adviser, a custodian, and a mutual fund distributor. Under these agreements, Dion performed administrative and recordkeeping services to their clients that were invested in the various mutual funds referenced in the service agreements. For providing such services, Dion was paid a quarterly fee by each third party that was based on the assets the clients had in the applicable mutual funds. The amount varied under the different agreements, with the highest being 30 basis points (0.30%).

Dion had disclosures in its Form ADV Part 2A regarding the fees paid under the service agreements, which stated that the compensation received by Dion would not exceed the highest fee. However, according to the SEC, this was incorrect since there were times that Dion received compensation under more than one service agreement for the same assets due to the intertwining arrangements between the parties. Specifically, the SEC order stated, “DMM did not disclose to clients, in its Form ADV or otherwise, either the possibility of payments from multiple sources based on the same client assets or the aggregate possible rate of such payments, both of which were material pieces of information.”

Additionally, Dion’s investment advisory services include utilizing asset allocation models with clients that invest in, among other things, some of the mutual funds named in the service agreements, which at certain times amounted to approximately 50–55% of the firm’s assets under management. This created potential conflicts of interest that also were not disclosed.

Dion admitted to the findings in the order and agreed to sanctions that included a $50,000 fine, adding disclosures to Form ADV Part 2A, providing a copy of the SEC order to clients, and certifying in writing and providing evidence to the SEC that Dion has complied with the undertakings outlined in the order.

Disclosures are one of the cornerstones of an advisory firm’s fiduciary duty. Now is the time to review your Form ADV to ensure accuracy and completeness surrounding all the required areas including but not limited to the firm’s services, compensation arrangements, affiliations, and conflicts surrounding the firm’s business.

Core Compliance can help assist firms with reviewing and drafting Form ADV. For more information on this and other related subjects, please contact us at (619) 278-0020 to schedule a consultation.

[1] In the Matter of Dion Money Management, LLC (Release No. 4146 / July 24, 2015)


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