SEC Orders Advisory Firm to Reimburse Clients for Taking Undisclosed Compensation
Sept. 25, 2019
File No. 3-19514
September 25, 2019 - The Securities and Exchange Commission today announced that registered investment adviser and broker-dealer Hefren-Tillotson, Inc. (Hefren) has agreed to settle charges that it received undisclosed compensation of $1.95 per advisory client trade from its unaffiliated clearing broker, totaling approximately $250,000. As part of the settlement, Hefren will return the funds to harmed investors.
The SEC's Order finds that Hefren's clearing broker charged Hefren clients a $7.95 service charge, an amount that was originally designed to equal the clearing broker's charges for clearing and executing trades of stocks, exchange-traded funds, and mutual funds. Over time, though, according to the Order, the clearing broker's fee to Hefren for clearing and execution decreased to $6.00 per transaction. Over the course of four years, Hefren received the difference, which was $1.95 per client trade, totaling approximately $250,000. The SEC's Order finds that, although Hefren told clients that they would pay $7.95 to trade, the firm failed to inform them that the service charges were not based on the clearing broker's actual charges for execution and clearing trades and that the firm received compensation of $1.95 for each client trade. Thus, according to the Order, Hefren failed to disclose a conflict of interest created as a result of the undisclosed compensation and breached its fiduciary duty to seek best execution for its advisory clients.
The SEC's Order finds that Hefren violated Section 206(2), an antifraud provision of the Investment Advisers Act of 1940.
Without admitting or denying the SEC's findings, Hefren consented to a censure and the entry of a cease-and-desist order from committing or causing further violations of Section 206(2). Hefren further agreed to pay disgorgement of $254,060, prejudgment interest of $45,905, and a civil penalty of $80,000 and has agreed to distribute these funds to harmed investors.
The SEC’s investigation was conducted by Andrew Shoenthal and Paul Montoya of the Asset Management Unit in Chicago. The SEC’s examination that led to the investigation was conducted by Bill Chiu, Malinda Pileggi, Stacey Gohl, Kent McAllister, and Will Davis.