SEC Charges Two Investment Advisers and Orders Them to Repay Clients Harmed by Undisclosed Conflicts
July 9, 2021
File No. 3-20390
July 9, 2021 - The Securities and Exchange Commission today announced settled charges against Kestra Advisory Services, LLC and Kestra Private Wealth Services, LLC (collectively, the Kestra Advisers) for failing to disclose compensation received by their affiliated broker-dealer.
According to the SEC's orders, the Kestra Advisers invested advisory client assets in certain mutual funds for which their affiliated broker-dealer received revenue sharing payments from its clearing broker. As stated in the orders, certain of the mutual funds that paid revenue sharing were more expensive than lower-cost options available to clients, including instances when there were lower-cost share classes of the same mutual funds available to clients that did not result in any revenue sharing. The orders also find that the Kestra Advisers' affiliated broker-dealer received compensation resulting from transaction fees charged on mutual fund trades and non-transaction fees for certain services provided to the Kestra Advisers' advisory clients, which were greater than the amount charged to their affiliated broker-dealer by the clearing broker for those trades and services (collectively, fee markups). According to the orders, the Kestra Advisers breached their fiduciary duties to advisory clients by failing to provide full and fair disclosure regarding the two types of compensation received by their affiliated broker-dealer and the related conflicts of interest. In addition, the orders find that the Kestra Advisers failed to adopt and implement policies and procedures designed to prevent violations of the federal securities laws regarding their mutual fund share class selection, fee markup practices, and best execution, and that the Kestra Advisers violated their duty to seek best execution.
The SEC's orders find that the Kestra Advisers 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, Kestra Advisory Services will pay disgorgement of $7,229,802, prejudgment interest of $1,273,370, and a civil penalty of $1,500,000. Kestra Private Wealth Services, without admitting or denying the SEC's findings, will pay disgorgement of $208,187, prejudgment interest of $31,382, and a civil penalty of $60,000. The Kestra Advisers have agreed to cease-and-desist orders, to be censured, and to distribute the funds to harmed investors.
The SEC's investigation was conducted by Marc D. Ricchiute and Kimberly L. Frederick, both from the Asset Management Unit in the Denver Regional Office. John Farinacci, an industry expert in the Asset Management Unit, assisted with the investigation.