SEC Charges Investment Adviser with Breach of Fiduciary Duty and Orders It to Repay Over $800,000 to Harmed Clients
May 31, 2022
File No. 3-20872
May 31, 2022 - The Securities and Exchange Commission today announced settled charges against Madison Avenue Securities, LLC, a California-based, dually-registered investment adviser and broker-dealer for breach of fiduciary duty in connection with its share class selection practices and related receipt of third-party compensation based on advisory client investments in certain mutual funds, including cash sweep money market funds.
The SEC's order finds that Madison engaged in practices that violated its fiduciary duty to its advisory clients. The order finds that, since at least February 2016, Madison invested advisory clients in (1) cash sweep money market funds for which Madison received revenue sharing, (2) mutual funds that resulted in Madison receiving fees from at least February 2016 through April 2018 pursuant to Rule 12b-1 under the Investment Company Act of 1940, when lower-cost share classes of the same funds were available to those clients, and (3) no-transaction-fee mutual funds for which Madison also received revenue sharing. The SEC's order finds that Madison did not disclose or did not adequately disclose the conflicts associated with the compensation Madison received from these client investments. With respect to the 12b-1 fees, the order finds that Madison, although eligible to do so, did not self-report to the SEC pursuant to the Division of Enforcement's Share Class Selection Disclosure Initiative. The order also finds that Madison breached its duty to seek best execution by causing advisory clients to invest in more expensive share classes of mutual funds when share classes of the same funds that presented a more favorable value were available to clients under the particular circumstances in place at the time of the transactions, and further breached its duty of care by failing to undertake an analysis to determine whether the particular mutual fund share classes and money market funds it recommended were in the best interests of its advisory clients. Finally, the order finds that Madison failed to adopt and implement written compliance policies and procedures reasonably designed to prevent these violations.
The SEC's order finds that Madison violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder. Without admitting or denying the findings, Madison consented to a cease-and-desist order and a censure, and agreed to pay disgorgement of $579,523.76, prejudgment interest of $73,649.93, and a civil money penalty of $150,000. Madison also agreed to distribute funds to harmed clients and comply with certain undertakings.
The SEC's investigation was conducted by Adam Schneir and Gary Y. Leung from the Asset Management Unit in Los Angeles. John Farinacci, an industry expert in the Asset Management Unit, assisted with the investigation.