SEC Charges Investment Adviser for Failing to Review Whether Wrap Accounts Were Appropriate for Clients
Aug. 26, 2022
File No. 3-21008
August 26, 2022 - The Securities and Exchange Commission today announced settled charges against Kovack Advisors, Inc., a registered investment adviser based in Florida, for misconduct related to its wrap fee program.
According to the SEC's order, contrary to its disclosures and internal policies, KAI failed at various times over several years to review the accounts of clients in its wrap fee program to determine whether the program remained suitable for clients. The order further finds that, as a result of this conduct, certain KAI wrap clients remained in the wrap fee program despite the lack of activity in their accounts. In addition, the order finds that KAI failed to adequately disclose to wrap clients that they would be charged for certain transaction costs, in addition to the wrap program fee.
The SEC's order finds that KAI willfully violated the antifraud and compliance provisions of 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, KAI consented to a cease-and-desist order and a censure, and agreed to pay disgorgement of $166,239, prejudgment interest of $33,274, and a civil money penalty of $700,000. KAI also agreed to distribute the funds to harmed clients and to comply with certain undertakings.
The SEC's investigation was conducted by Christina N. Filipp and supervised by Jeremy E. Pendrey, both from the Enforcement Division's Asset Management Unit in the San Francisco Regional Office, with assistance from Artur Minkin and Jennifer Ferris in the Division of Economic and Risk Analysis. An examination of KAI by Jared Mackley and Ian Greber-Raines, supervised by Marita Bartolini, of the SEC's Division of Examinations contributed to the investigation.