US Investment Firm Collects $440,000 in Rebate Payments - Forgets to Inform Clients

A North American financial services firm has been charged by the country’s securities regulator, the Securities and Exchange Commission (SEC), with earning commissions by promoting financial funds to users without disclosing their compensation. The move highlights the regulators commitment to enforcing transparency across investment products.

Robare Group Ltd, a financial services firm that specialises in retirement planning, has been found guilty by the SEC’s Enforcement Division. The unit’s investigation found that the firm has been recommending certain mutual funds to its client base without disclosing a key conflict of interest, as well as receiving rebates from brokerage firms that offered the fund.

Marshall S. Sprung, co-Chief of the SEC Enforcement Division’s Asset Management Unit, commented about the verdict: “Payments to investment advisers for recommending certain types of investments may taint their ability to provide impartial advice to their clients.”

The disclosure of commission payments has been a key focus for regulators across the developed world. In 2007, European regulators joined forces to initiate MiFID, under the guidelines, the directive encouraged firms to inform clients of the commission and/or rebates they earn on promoting products.

“By failing to fully disclose its agreements with the brokerage firm, Robare Group deprived its clients of important information they were entitled to receive,” added Mr. Sprung.

The SEC’s investigation found that the firm had earned $440,000 in earnings through the promotion of the funds during an eight-year period. Furthermore, the broker identified a major breach by the advisory firm despite it acting on changes, the official Order stating that in 2011 the amended Form ADV is to disclose the compensation agreement. However, the altered form and later disclosures falsely stated that the firm did not receive any economic benefit from a non-client for providing investment advice.

The regulator's Asset Management Unit is keen to highlight discrepancies made by firms in relation to compensation from recommendations, it earlier charged an Oregon-based firm for a similar breach.

Participants in the financial markets sector have been addressing the regulatory guidelines around compensation payments for product promotions. In the margin FX industry, brokerage firms in developed markets have been battling with money managers who attempt to earn rebates on client introductions as well as performance fees. Regulated fund managers are given some leeway where managers can earn rebates on traded volume.