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SEC Charges Oregon Advisor With Failure To Disclose Conflicts Of Interest

Harriet Davies

7 September 2012

The Securities and Exchange Commission has charged an Oregon-based advisory business and its owner for failing to disclose conflicts of interest and revenue-sharing agreements.

Christopher Keil Hicks and his firms, Focus Point Solutions and The H Group, will pay a $1.1 million settlement after allegedly failing to disclose revenue-sharing agreements with a brokerage firm. Focus Point clients were being recommended mutual funds managed by the brokerage firm while Focus received a percentage of client assets invested in the funds, the SEC says.

The firm neither admitted nor denied the charges.

Focus Point is a registered investment advisor located in Portland, OR, providing investment advice and back-office custodial support to both related and unrelated investment advisory firms. It served as a non-discretionary investment advisor with around $1.7 billion in assets under management, as of December 2011, the SEC's order says. It also serves as the sub-adviser to the $65 million Generations Multi-Strategy Fund, a series of the Northern Lights Fund Trust.

Focus Point also allegedly failed to disclose a conflict of interest while competing to become the Generations fund's sub-advisor. It misrepresented to the trustees of the fund that it would only receive fees paid under the sub-advisory contract while it had an agreement in place with the fund’s primary advisor.

Furthermore, the vast majority of the Generations fund’s trustees were H Group shareholders, creating a conflict of interest as the firm is related to Focus Point, which stood to gain fees from the arrangement.

“We will continue to focus our enforcement and examination efforts on uncovering arrangements where advisors receive undisclosed compensation and conceal conflicts of interest from investors,” said Marc Fagel, director of the SEC’s San Francisco regional office.

The issue is highly relevant to the investment advisory industry, which is currently split under two main standards of governance. However, Dodd-Frank gave the SEC the power to establish a uniform fiduciary standard for advisors and broker-dealers providing personalized investment advice to retail customers. Following the signing of the Act, an SEC staff study in January 2011 recommended such a standard. Many in the RIA industry call for such a move.

The latest news highlights how, to be effective in protecting clients, such a standard must also be implemented effectively.

Jeff Spears, co-founder and chief executive of Sanctuary Wealth Services, who argues for a fiduciary standard, told this publication recently that while implementation is “a huge issue,” there are factors working in the SEC's favor. “It is much easier to regulate a fiduciary than it is to regulate suitability,” he said.

“With the fiduciary standard there really is only one thing to regulate. It’s just one thing. It is, are you conflicted in the advice you're providing your client? It’s binary,” he added.

“Suitability is a ‘grey area’ – were clients sophisticated enough? Did you provide them with enough information? That’s a lot of grey. There is always a judgment call there. It’s not a judgment call on the fiduciary.”