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Regulation and Compliance > Federal Regulation > SEC

SEC Advisor Fraud Charge Shows Hazards of 'Dual-Hat' CCOs

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A recent fraud charge levied by the Securities and Exchange Commission against an advisor shows that the dual hat senior executive/chief compliance officer role “doesn’t work,” opines Cipperman Compliance Services.

The SEC charged Stephen Brandon Anderson with defrauding clients by overcharging advisory fees of at least $367,000.

According to the SEC’s order, Anderson owned and operated River Source Wealth Management, LLC, a now-defunct registered investment advisor in North Carolina. During the relevant time period, Anderson owned and operated River Source and served as its chief compliance officer.

River Source’s primary revenue stream was customer advisory fees, with customer agreements stating those fees would be based on each customer’s assets under management. The company was formally dissolved in February 2018.

In 2015 and 2016, however, Anderson overcharged a majority of his clients, with the amount and percentages varying, but in the aggregate, amounting to approximately 40% more than the agreed-upon maximum customer advisory fees, the SEC states.

In total, River Source received approximately $650,000 in advisory fees for 2015, of which at least $185,816 were overcharges, the order states. River Source received approximately $640,000 in advisory fees for 2016, of which at least $181,360 were overcharges.

Anderson also misled his clients about why he transferred their assets from River Source’s long-time asset custodian, falsely stating that it was his decision and that the separation was “amicable.” According to the SEC order, the asset custodian ended its relationship with River Source after it noticed irregular billing practices, requested documents to support certain charges, and failed to receive those documents from Anderson.

The order finds that Anderson made material misstatements in reports filed with the commission, including overstating River Source’s assets under management by at least $34 million (18%) in 2015 and $61 million (35%) in 2016, and failed to implement required compliance policies and procedures.

He also failed to disclose two client lawsuits, the order states.

“When advisors breach their duty to clients by misleading and overcharging them, they can expect the SEC will craft a package of remedies that will compensate harmed investors, provide additional safeguards for prospective investors, and deter similar conduct,” said Carolyn Welshhans, associate director in the SEC’s Enforcement Division, in a statement.

Anderson agreed to a cease-and-desist order and a censure, and agreed to pay disgorgement and prejudgment interest of $405,381 and a $100,000 penalty. Payments will be distributed to harmed investors through a fair fund. Anderson consented to the order without admitting or denying the findings.

In commenting on the order, Cipperman Compliance Services states that “the dual hat CCO model (i.e. a senior executive also serving as the Chief Compliance Officer) doesn’t work.”

The dual-hat CCO “usually does not have the time, expertise or interest to do the job properly,” Cipperman wrote. “Also, a CCO must have enough independence from the business to properly enforce the applicable regulatory and compliance obligations.”


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