SEC Sanctions Two Investment Advisers for Best Execution Failures
The Securities and Exchange Commission today sanctioned two investment advisory firms for failing to seek best execution on client trades placed with their in-house brokerage divisions.
An SEC investigation found that New York-based A.R. Schmeidler & Co. (ARS), which is dually registered as an investment adviser and a broker-dealer, failed to reevaluate whether it was providing best execution for its advisory clients when it negotiated more favorable terms with its clearing firm. This resulted in ARS retaining a greater share of the commissions it received from clients. The firm failed to implement policies and procedures reasonably designed to prevent its best execution violations.
ARS agreed to pay more than $1 million to settle the charges.
A separate SEC investigation found that Gregory W. Goelzer and his Indianapolis-based dually registered firm Goelzer Investment Management (GIM) made misrepresentations in its Form ADV about the process of selecting itself as broker for advisory clients. The firm failed to seek best execution for its clients by neglecting to conduct the comparative analysis of brokerage options described in its Form ADV, and recommended itself as broker for its advisory clients without evaluating other introducing-broker options as the firm represented it would.
Goelzer and GIM agreed to pay nearly $500,000 to settle the charges.
“These cases send a clear message to dually registered investment advisers and broker-dealers about our expectations in connection with their best execution analysis,” said Andrew Ceresney, Co-Director of the SEC’s Division of Enforcement. “Investment advisers must carefully analyze whether their clients are obtaining the most beneficial terms reasonably available for their orders, particularly if those orders are executed through affiliated broker-dealers. We will hold accountable those advisers who fail to do so.”
Marshall S. Sprung, Co-Chief of the SEC Enforcement Division’s Asset Management Unit, added, “There is a clear conflict of interest when investment advisers execute client trades through their broker-dealer arm. The unit is focused on pursuing dually registered firms that fail to address this conflict through robust disclosure, best execution analysis, and compliance procedures.”
ARS agreed to pay disgorgement of $757,876.88, prejudgment interest of $78,688.57, and a penalty of $175,000. The firm also must engage an independent compliance consultant. Without admitting or denying the SEC’s findings, ARS consented to a censure and cease-and-desist order.
GIM agreed to pay disgorgement of $309,994, prejudgment interest of $53,799, and a penalty of $100,000. The firm must comply with certain undertakings, including the continued use of a compliance consultant and the separation of its chief compliance officer position from the firm’s business function. Goelzer agreed to pay a $35,000 penalty. Without admitting or denying the SEC’s findings, Goelzer and GIM also consented to censures and cease-and-desist orders.
The SEC’s investigation of ARS was conducted by Michael Birnbaum, Jason Sunshine, and Lara Shalov Mehraban of the New York Regional Office. Examinations of ARS were conducted by Francine Catapano, Thomas Thanasules, and David Eidelman of the New York Regional Office’s investment adviser/investment company examination program, and Stephen Debella, Kenny Sabogal, and Ronald Krietzman of the New York Regional Office’s broker dealer examination program. The SEC’s investigation of GIM was conducted by Jeffrey Shank and Paul Montoya of the Asset Management Unit in the Chicago Regional Office, and Max Gillman of the Chicago office’s investment adviser/investment company examination program. The examination of GIM was conducted by Angie Evans, Max Gillman, Kelvin Davis, Alicia Tate, Douglas Adams, and Peter Driscoll of the Chicago office’s investment adviser/investment company examination program.