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October 13, 2016 at 07:59 AM
The SEC has now moved against at least six investment advisors for, among other things, using the word ‘may’ in their disclosures to describe, for example, compensation that advisors ‘may’ receive, or conflicts of interest that ‘may’ be posed. In a nutshell, the SEC contends that the word ‘may’ is misleading to disclose contingent or prospective circumstances if the circumstances are no longer contingent or prospective, but in fact already exist. Given how common the word ‘may’ is in disclosure, understanding these cases can help advisors avoid a similar fate.
In a case settled last week with principals of Belvedere Asset Management, the advisor invested separate account client assets in a proprietary mutual fund and collected both account fees and fund fees. According to the SEC’s order, some separate account clients were provided disclosure that the advisor ‘may’ invest client assets in the advisor’s fund and that this ‘may’ create a conflict of interest relating to fees. However, this disclosure was considered inadequate because, at the time it was made, the advisor had actually invested those particular clients’ assets in the advisor’s fund and the advisor therefore had an actual conflict of interest.
In another case, settled with principals of Concord Equity Group Advisors, the advisor disclosed that its affiliated broker ‘may’ receive fees for referring the advisor’s clients to other broker-dealers and that this ‘may’ present a conflict of interest. The SEC found use of the prospective ‘may’ in that context misleading because it suggested the mere possibility that the affiliated broker would make a referral or be paid referral fees, when in fact a commission-sharing arrangement was already in place and generating income to the affiliated broker and the advisor’s principals.
A case settled with Advantage Investment Management was similar. There, disclosure about loans that the advisor’s reps ‘may’ receive and the ‘potential’ conflict that posed was considered misleading when loans had already been made to the advisor’s reps and were still outstanding.
Three other ‘may’ cases didn’t settle and were decided by Administrative Law Judges:
- In the Larry Grossman case, the advisor disclosed that it ‘may receive’ certain compensation and indicated in testimony that ‘may’ was used because the advisor did not always receive the compensation and whether the advisor did receive it depended on the client. In finding this disclosure misleading, the ALJ cited Merriam-Webster’s Dictionary to note the word ‘may’ is used to indicate possibility or probability and, given that the advisor was already receiving the compensation, it was not a possibility but a fact.
- In the Total Wealth Management case, the ALJ found the advisor’s disclosure that it ‘may’ have revenue sharing agreements ‘grossly inaccurate’ and ‘misleading’ when made after the advisor had already entered into revenue sharing agreements with numerous entities, which governed a substantial portion of client investments.
- In a case brought against Robare Group, the advisor used ‘may’ in disclosing that it ‘may receive’ certain compensation in a revenue sharing program because, according to testimony, the program agreement provided that the payments could stop at any time and that any party to the agreement could cancel it. In contrast to the other cases, the ALJ in Robare did not find the disclosure misleading, but noted that the word ‘may’ accounted for the possible cessation of payments.
The ALJ’s decision in Robare offers some hope that cases brought over the word ‘may’ won’t always be decided against the advisor. However, wise advisors don’t want to win cases brought by the SEC; they want to avoid them altogether.
