RIA Compliance Blog
On March 8, 2017, the Securities and Exchange Commission (“SEC”) issued an Order Instituting Administrative and Cease-and-Desist Proceedings (“Order”) against Voya Financial Advisors, Inc. (“Voya”), an SEC-registered investment adviser. The Order, to which Voya consented, obligates Voya to pay disgorgement of $2,621,324, prejudgment interest of $174,629.78, and a civil money penalty of $300,000.
The SEC’s Order claims that Voya did not inform its clients that it was receiving compensation from a third-party broker-dealer and that these receipts created a conflict of interest. Section 206(2) of the Investment Advisers Act of 1940 (“Advisers Act”) states that investment advisers are forbidden from participating in “any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client.” Section 207 provides that investment advisers are not allowed to “make any untrue statement of a material fact in any registration application or report filed with the Commission, or to omit to state in any such application or report any material fact which is required to be stated therein.” Finally, Rule 206(4)-7 under the Adviser’s Act compels investment advisers to “[a]dopt and implement written policies and procedures, reasonably designed to prevent violation” of the Adviser’s Act and the rules thereunder.
The SEC found that Voya engaged a clearing broker that performs clearing and custody services for the majority of Voya’s advisory clients since 1998. In about 2006, Voya became involved in its clearing broker’s no-transaction-fee mutual fund program. According to the terms of the program’s agreement, the clearing broker would divide with Voya a percentage of service fees obtained from certain mutual funds. In April 2014, Voya and the clearing broker entered into another agreement whereby Voya consented to supply various administrative services to the clearing broker. In return, the clearing broker consented to share with Voya a percentage of service fees it obtained from mutual funds in the program.
The SEC found that these revenue sharing agreements caused a conflict of interest because the payments received motivated Voya to recommend the mutual funds in the clearing broker’s program, as opposed to other mutual funds that may have been better suited to their advisory clients. Voya was therefore required to disclose this conflict of interest in its Form ADV Part 2A. However, according to the Order, Voya did not disclose in its Form ADV the fact that the clearing broker made payments to Voya “based on [Voya] client assets invested in the [program] mutual funds.” Moreover, Voya did not inform clients about the payments it received from the clearing broker for providing administrative services. Thus, Voya violated Section 206(2) and 207 of the Advisers Act by omitting to state the relevant conflicts of interest in its Form ADV Part 2A.
The SEC’s Order also claims that at the time these conflicts of interest existed, Voya’s policies and procedures included a rule requiring Voya to inform advisory clients of any material conflicts of interest, such as the possibility of Voya and its investment adviser representatives receiving compensation in addition to advisory fees. As stated in the SEC’s Order, Voya did not sufficiently enforce this rule. As a result, Voya was found to be in violation of Rule 206(4)-7 by failing to sufficiently implement this rule in its business practices.
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