SEC Charges Investment Adviser for Supervisory and Compliance Failures
Sept. 3, 2021
File No. 3-20526
September 3, 2021 - The Securities and Exchange Commission instituted settled charges against Missouri-based Frontier Wealth Management, LLC for failures to supervise and to adopt and implement written policies and procedures reasonably designed to prevent its investment advisory representatives (IARs) from recommending complex financial products to clients for whom they were not suitable. The SEC also charged Kansas-based IAR Shawn Sokolosky, on a settled basis, for making unsuitable investment recommendations and misstatements to clients regarding investments in a complex financial product.
The SEC's order finds that, from January 2016 to February 2018, approximately 177 Frontier retail clients invested approximately $45 million into a Feeder Fund, which provided its clients access to invest in another fund (Fund A). Fund A used complex option strategies and synthetic futures positions to generate returns, which carried speculative and substantial risks with high volatility. The order finds that, without adequate policies, procedures, training, and supervision in place at Frontier, certain IARs failed to reasonably assess whether the Feeder Fund was suitable for each client. Consequently, certain clients with low risk tolerances and conservative trading preferences invested in the Feeder Fund. The SEC's order further finds that Sokolosky recommended that certain of his clients invest in the Feeder Fund without adequately assessing whether the product was suitable for them, and that he misrepresented the Feeder Fund's risks and made misleading statements about the fees associated with the Feeder Fund. In February 2018, due to extreme volatility in U.S. equity markets, Fund A lost about 35% of its value, resulting in losses of approximately $16 million to Frontier's clients who invested in the Feeder Fund.
The SEC's order finds that Frontier violated Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder and failed reasonably to supervise its IARs within the meaning of Section 203(e)(6) of the Advisers Act, and that Sokolosky violated Sections 17(a)(2) and (3) of the Securities Act of 1933 and Section 206(2) of the Advisers Act. Without admitting or denying the findings in the order, Frontier consented to a censure and a cease-and-desist order, and agreed to pay $267,617 in disgorgement, $47,096 in prejudgment interest, and a $350,000 civil penalty. Also without admitting or denying the findings, Sokolosky consented to a cease-and-desist order, 12-month collateral and investment company suspensions, and to pay a $100,000 civil penalty.
The SEC's investigation was conducted by Kevin Wisniewski and Marlene Key-Patterson and supervised by Ana Petrovic of the Complex Financial Products Unit. The investigation was prompted by an examination by Willie Davis, Jared Jarvis, Sarah Niblock, Erik Lillya, and Christopher Reiff of the Chicago Regional Office Investment Adviser Examination Team.