New York-based investment adviser Zoe Financial Inc. reached a settlement on charges involving failures to disclose conflicts of interest related to an advisor-referral service, the Securities and Exchange Commission announced.
The firm did not fully and fairly disclose material facts regarding these conflicts to clients and prospective clients, the SEC said, and was fined $450,000.
According to the SEC’s order, Zoe Financial operated a referral service which used an algorithm to match third-party investment advisers in its network with individuals seeking a recommendation for an investment adviser. Zoe Financial salespeople typically would then follow up with people who did not schedule a meeting with one of the matches generated by the algorithm, and often the salespeople subsequently recommended additional advisers to the client, beyond the recommendations generated by the algorithm.
In January 2023, Zoe Financial launched Zoe Wealth, offering sub-advisory services, account onboarding assistance, and other back-office support for its network of investment advisers. It was alleged that Zoe Financial had a financial incentive for advisers in its network to use Zoe Wealth and encouraged them to do so. “Further, as described in the order, while Zoe Financial’s algorithm did not consider whether an adviser used Zoe Wealth when it generated recommendations, salespeople often became involved in the referral process, and on many occasions suggested advisers that had not been initially recommended by the algorithm,” the SEC said..
The order found that Zoe Financial did not adequately disclose the resulting conflict of interest in its Form ADV Brochure until December 2024. The SEC added that while Zoe Financial disclosed that certain advisory firms held indirect minority interests in Zoe Financial and that this presented a conflict, Zoe Financial did not accurately describe how it mitigated that conflict.
“Investment advisers have a fiduciary obligation to fully and fairly disclose material conflicts of interest,” said Sheldon Pollock, Associate Director of the SEC’s New York Regional Office. “Advisers must live up to those disclosure obligations in all aspects of their advisory services, including when they offer a new technology or new feature to their clients.”
Zoe Financial was found to have willfully violated Section 206(2) of the Investment Advisers Act of 1940. The firm did not admit or deny the findings but agreed to a cease-and-desist order, a censure, and to pay a civil monetary penalty of $450,000.
The order acknowledges certain remedial measures taken by Zoe Financial, including making compliance manual revisions and hiring an in-house chief compliance officer.
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