A Phoenix-based registered investment advisor and its CEO were penalized after they allegedly concealed conflicts of interest from clients and failed to enforce basic compliance requirements, InvestmentNews reported.
The SEC announced settled charges against Foundations Investment Advisors, LLC and its former Chief Executive Officer, Bryon E. Rice, who agreed to pay about $2.1 million in fines for breaches of fiduciary duty and other violations.
According to the SEC’s order, Foundations failed to disclose conflicts of interest related to investments that it recommended to approximately 25,000 advisory clients.
The conflicts included:
(1) a profit-sharing interest that Rice had in a Foundations sub-adviser, which provided an investment model portfolio to Foundations’ clients that included an exchange-traded fund that another adviser managed (the “ETF”);
(2) Foundations having an expense sharing agreement related to four other exchange-traded funds that gave Foundations an incentive to recommend these products to clients; and
(3) affiliations between Foundations’ former Chief Investment Officer and other parties that acted as an adviser and sub-adviser to Foundations and the ETF.
The SEC also found that Rice personally traded the ETF while serving as CEO of Foundations and while he was aware that the ETF was included as part of the sub-adviser’s investment model portfolio that Foundations recommended to its clients.
The Commission said that in September 2020, an entity wholly owned by Rice paid $100,000 for a 4.99% profit-sharing interest in what the agency called “Sub-Adviser A,” a firm that provided model portfolios to Foundations’ clients. Rice then sat on the investment committee that directed client assets into the subadvisor’s funds.
By the end of 2020, approximately 66% of Foundations’ client assets were invested in the subadvisor’s exchange-traded funds. According to the order, Rice received two payments totaling $434,162 from the subadvisor before terminating the arrangement in 2023. Foundations did not disclose the conflict until a Form ADV update in March 2021.
Furthermore, it was determined that Rice failed to pre-clear this trading as required by Foundations’ policies, and, as a result of Rice’s trading in the ETF, Foundations and Rice negligently breached their fiduciary duties.
Foundations also failed to properly implement its compliance policies, including provisions relating to disclosure of conflicts of interest and conducting annual reviews, and failed to enforce its code of ethics relating to pre-clearance of trades.
Foundations and Rice were found to have willfully violated Section 206(2) of the Investment Advisers Act of 1940, Foundations violated Sections 206(4) and 204A of the Advisers Act and Rules 206(4)-7 and 204A-1 thereunder, and that Rice caused Foundations’ violations of Sections 206(2), related to failing to timely disclose Rice’s profit-sharing interest in the Foundations sub-adviser, and 204A and Rule 204A-1 thereunder, related to failing to pre-clear Rice’s personal securities transactions.
Without admitting the SEC’s findings, Foundations consented to a cease-and-desist order, a censure, and to pay disgorgement of $152,628, prejudgment interest of $15,031.17, and a civil penalty of $1,200,000. Without admitting the SEC’s findings, Rice consented to a cease-and-desist order, a censure, and to pay disgorgement of $434,162, prejudgment interest of $5,395.28, and a civil penalty of $354,675.
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