SEC Charges Investment Adviser with Failing to Fully and Fairly Disclose Compensation and Conflicts of Interest, Orders It to Pay Harmed Clients

ADMINISTRATIVE PROCEEDING
File No. 3-21282

January 19, 2023 – The Securities and Exchange Commission today announced settled charges against registered investment adviser Moors & Cabot, Inc. for breach of fiduciary duty to advisory clients in connection with disclosure failures related to revenue sharing and incentive payments received from Moors & Cabot’s clearing brokers. The SEC also charged Moors & Cabot with additional disclosure failures and failing to implement disclosure-related policies and procedures.

The SEC’s order finds that Moors & Cabot failed to provide full and fair disclosure regarding material facts and conflicts associated with its receipt of certain compensation from its clearing brokers between at least February 2017 and September 2021. As set forth in the order, this compensation included: (1) transaction fee discounts and incentive credits that were contingent upon meeting certain dollar amount thresholds in cash sweep programs offered by the clearing brokers; (2) revenue sharing payments based in part on the amount of Moors & Cabot’s advisory clients’ assets in those cash sweep programs; (3) revenue sharing payments from margin loans provided to Moors & Cabot’s advisory clients; and (4) revenue sharing payments from postage and handling fees that one clearing broker charged to Moors & Cabot’s advisory clients. According to the order, the revenue sharing payments and financial incentives presented conflicts of interest for Moors & Cabot, because they created incentives for Moors & Cabot to: (a) allocate clients’ assets to cash; (b) recommend certain cash sweep options to certain customers; (c) recommend margin loans; and (d) utilize the clearing brokers. The Commission’s order states that, during certain time periods, Moors & Cabot did not adequately disclose the compensation arrangements or the associated conflicts of interest to advisory clients, and that Moors & Cabot also failed to fully and fairly disclose its disciplinary history and the disciplinary histories of two investment adviser representatives. The order also states that Moors & Cabot failed to implement written compliance policies and procedures related to the disclosure of compensation, conflicts of interest, and disciplinary histories.

The SEC’s order finds that Moors & Cabot 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, Moors & Cabot consented to a cease-and-desist order and a censure, and agreed to pay disgorgement of $1,436,182, prejudgment interest of $88,274, and a civil money penalty of $375,000. Moors & Cabot has also agreed to distribute funds to harmed investors and comply with certain undertakings.

The SEC’s case was handled by Kerry Dakin, Colin Forbes, Chip Harper, and Celia Moore of the SEC’s Boston Regional Office. Alex Lefferts of the Enforcement Division’s Office of Investigative and Market Analytics assisted with the investigation.