When Investment Adviser Commissions, Markups, Or Charges Are Undisclosed

It’s a well-known rule in “polite society.” One simply should not discuss money. And when it comes to asking someone to divulge their salary, Miss Manners has admonished, “It is unequivocally impolite to ask anyone how much money they make. Even if he really wants to know.” And so perhaps that helps unscrupulous investment advisers avoid disclosing their commissions, markups, or charges. But if you’re aware of advisers who are hiding this information from clients, consider coming forward to become an SEC whistleblower. Because, as we’ll discuss, it’s not about politeness. Willful failure to disclose their compensation may mean they’re failing to fulfill the fiduciary duties they owe their clients.

It’s been a long-standing requirement that investment advisers’ fiduciary duty requires that they disclose any material facts relating to their position. Forms of compensation fall into the category of material facts, because compensation may create conflicts of interest between the adviser and the client. (For instance, conflict arises if advisers are paid for recommending particular mutual funds to their clients.)

Beyond a general duty of disclosure, investment advisers are obligated to complete Form ADV, disclosing sales compensation, bonuses, and any distribution or service (‘trail’) fees from the sale of mutual funds. Further, they must identify any potential conflicts of interest and how they are resolving them.

And federal authorities take these violations seriously. In 2019, as an example, advisers’ failure to disclose advisory fees was determined to be a violation of the Investment Advisors Act of 1940, and the advisers were ordered to disgorge $61,275.52 in ill-gotten gains, $7,400.85 in prejudgment interest, and additional civil penalties of $165,000.

If you know of investment advisers who hide their rates of compensation from clients, contact the experienced attorneys at Silver Law Group and the Law Firm of David R. Chase. With years of experience in whistleblowing and other securities-related claims, they can explain the issues and your options going forward. For a free, confidential consultation, email us or call us today at (800) 975-4345.