SEC Charges Two Investment Advisers with Receipt of Undisclosed Fees and Other Disclosure Failures
June 6, 2022
File No. 3-20881; 3-20882
June 6, 2022 - The Securities and Exchange Commission today announced settled charges against Kathryn Jane Meredith and John Paul Harnish, both doing business as KM Advisory Services ("KMA"), a registered investment adviser based in New York, for breaching their fiduciary duties to KMA's clients and receiving over $790,000 in undisclosed fees from 2016 through 2020.
According to the SEC's orders, Meredith, from January 2016 through February 2020, and Harnish, from February 2020 through December 2020, received compensation from mutual fund fees pursuant to Rule 12b-1 under the Investment Company Act of 1940 and sales loads commissions without fully and fairly disclosing their related conflicts of interest to KMA's clients. KMA invested the vast majority of its advisory clients' assets through its introducing broker-dealer with whom Meredith and Harnish were registered representatives, and in certain mutual funds that paid 12b-1 fees and charged sales load commissions. As a result, KMA's clients paid 12b-1 fees and sales load commissions to the introducing broker-dealer, a portion of which it shared with Meredith and Harnish, and thus KMA. KMA also breached its duty of care by not routinely comparing the introducing broker-dealer's order execution with other broker-dealers, which KMA's advisory relationship with its clients required. KMA therefore caused its advisory clients to invest through the introducing broker-dealer and in share classes of mutual funds that charged 12b-1 fees when other share classes of the same funds were available at other broker-dealers that may have presented a more favorable value for KMA's clients under the particular circumstances in place at the time of the transactions.
The SEC's order against Meredith d/b/a KM Advisory Services finds that Meredith willfully violated the antifraud provisions of Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 thereunder, which governs an adviser's compliance procedures and practices. Without admitting or denying the SEC's findings, Meredith consented to a cease-and-desist order, a censure, agreed to pay disgorgement of $574,743 and prejudgment interest of $77,252, and to pay a civil penalty of $100,000.
The SEC's order against Harnish d/b/a KM Advisory Services finds that Harnish willfully 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 SEC's findings, Harnish consented to a cease-and-desist order, a censure, certain undertakings, and agreed to pay disgorgement of $220,097 and prejudgment interest of $5,549, and to pay a civil penalty of $75,000.
The SEC's investigation was conducted by Stephen B. Holden with assistance from John Farinacci and supervised by Andrew Dean, all from the Asset Management Unit. Lee Greenwood of the New York Regional Office also assisted with the investigation. The examination that led to the investigation was conducted by Raymond Slezak, Azam Riaz, Mary Beth Lynch and Lisa Blackburn of the New York Regional Office.