The Securities and Exchange Commission obtained a final judgment against New York City-based investment adviser Brite Advisors USA, Inc. that bars the firm from the industry, Financial Advisor reports.
The action stems from charges that Brite Advisors failed to comply with SEC requirements for the safekeeping of client assets and failed to disclose material risks and conflicts of interest associated with Brite Advisors’ recommendations to clients to use a related firm in Australia as a custodian.
The commission noted that registered investment advisers that have custody of client assets are subject to the “custody rule,” which requires that if a related person maintains client funds or securities, the adviser must obtain an internal control report as to the safeguarding of client funds and securities. The SEC alleges that since 2019, when Brite USA began having a related firm, Brite Australia, maintain its clients’ assets, it failed to comply with the custody rule.
The SEC’s complaint also alleged that Brite USA breached its fiduciary duties to clients by failing to fully disclose conflicts of interest and risks to client assets resulting from Brite Australia’s borrowing of millions of dollars using Brite USA’s client assets as collateral. The borrowing was to provide operational funding to Brite USA and other related companies. The firm was accused of putting about $80 million in client assets at risk by allowing this arrangement without disclosing it to the clients.
The SEC said that Brite Advisory Group, the parent company of the two investment advisors, sent operational funding to Brite Advisors secured by the omnibus account held at Brite Australia, in effect using Brite Advisors client money to fund Brite Advisors’ operations.
“Brite USA’s reliance on the Brite Group for funding creates conflicts of interest that Brite USA, as an investment advisor, has a fiduciary duty to fully and fairly disclose to its advisory clients. Brite USA has failed to do so,” the complaint said. “Moreover, Brite USA has failed to comply with its fiduciary duty to fully disclose that, during the relevant period, a primary source of the funding to cover its operating expenses has been margin loans or other debt secured by client assets, including the assets of Brite USA clients.”
Brite USA did not admit or deny the allegations but consented to the entry of the final judgment by the U.S. District Court for the Southern District of New York last month. The judgment permanently enjoins Brite USA from violating Section 206(2) of the Investment Advisers Act of 1940 and Rule 206(4)-2 thereunder, and imposes a conduct-based injunction that permanently enjoins it from acting as an investment adviser.
Brite did not immediately respond to a request for comment, according to the report.
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