The Securities and Exchange Commission has fined New York-based registered investment advisor One Oak Capital Management LLC and a former One Oak investment advisor representative, Michael DeRosa, for moving clients from brokerage to advisory accounts when it wasn't in their best interest.
From approximately June 2020 through October 2023, "One Oak and DeRosa recommended that DeRosa’s customers at an unaffiliated broker-dealer, at which he was simultaneously employed, convert more than 180 brokerage accounts to advisory accounts at One Oak," according to the SEC’s order.
Most of these customers, the order states, "were elderly and had been long-time customers of DeRosa’s at the broker-dealer, which charged the customers on a commission basis."
The change in fee structure resulted in "significantly increased costs, but the clients generally received no additional services or benefits," according to the SEC.
As a result of the conversions, the investment advisor generated an additional $268,000 in revenue, with 75% of that amount retained by DeRosa.
One Oak consented to an order requiring it to pay a civil penalty of $150,000 and to retain an independent compliance consultant to review certain of its policies and procedures related to its retail business. Without admitting or denying the findings, DeRosa agreed to a civil penalty of $75,000 and to a nine-month industry suspension.
Clients' Best Interest
One Oak and DeRosa also failed to adequately consider whether it was in their clients’ best interests to convert their brokerage accounts to advisory accounts, and in fact, many of the accounts were not suitable to be advisory accounts, the order states.
In violation of their fiduciary duties, One Oak and DeRosa "never disclosed in advance that the conversions from brokerage accounts to advisory accounts resulted in significantly higher fees for clients, and increased compensation for DeRosa, nor disclosed the resulting conflict of interest," the order states.
For instance, "the accounts converted in 2020 and 2021 incurred a more than seven-fold increase in fees and costs on average, and some clients paid more than ten times in advisory fees to One Oak as they had paid in commissions to the broker-dealer over a similar time period," the SEC said.
First Action Under New Administration
"This case is particularly significant as it marks the first [Investment Adviser] Act enforcement action under the new administration, providing insight into the potential regulatory and enforcement priorities for the next four years," Iron Road Partners said in a note.
The One Oak case is reminiscent of enforcement cases brought under former SEC Chairman Jay Clayton "signaling that the new administration will maintain a strong focus on enforcement but may shift the nature of the cases it pursues," Iron Road said.
Unlike the enforcement cases brought by former SEC Chairman Gary Gensler, which "often focused on large Wall Street investment managers," the One Oak case focuses on retail investors, "making investor protection a clear priority," Iron Road said.
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