UNITED STATES OF AMERICA
In the Matter of
RUDNEY ASSOCIATES, INC., and ERIC A. RUDNEY
|ORDER INSTITUTING ADMINISTRATIVE AND CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS AND A CEASE-AND-DESIST ORDER PURSUANT TO SECTIONS 203(e), 203(f), AND 203(k) OF THE INVESTMENT ADVISERS ACT OF 1940 AS TO RUDNEY ASSOCIATES, INC. AND ERIC A. RUDNEY|
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Sections 203(e), 203(f), and 203(k) of the Investment Advisers Act of 1940 ("Advisers Act") against Rudney Associates, Inc. ("Rudney Associates") and Eric A. Rudney ("Rudney") (collectively "Respondents").
In anticipation of the institution of these proceedings, Respondents have submitted individual Offers of Settlement (the "Offers") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over them and the subject matter of these proceedings, Respondents consent to the entry of this Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant to Sections 203(e), 203(f), and 203(k) of the Investment Advisers Act of 1940 ("Order"), as set forth below.
On the basis of this Order and Respondents' Offers, the Commission finds1 that
1. This proceeding stems from the failure of Rudney Associates, a registered investment adviser, and Rudney, its principal, to disclose to their clients a material potential conflict of interest. Unbeknownst to its clients, Rudney Associates received $20,000 in cash from TD Waterhouse Investor Services, Inc. ("TDW"), the broker-dealer to whom Rudney Associates directed client trades.
2. By failing to inform its advisory clients that it received an economic benefit from TDW and failing to disclose this information as required in its Form ADV, Rudney Associates willfully violated, and Rudney willfully aided and abetted and caused Rudney Associates' violations of, Sections 206(1), 206(2), and 207 of the Advisers Act.
3. Rudney Associates also failed to disclose the existence of a soft-dollar arrangement with TDW on its Form ADV and committed certain record-keeping violations of the Advisers Act. Therefore, Rudney Associates willfully violated and Rudney willfully aided and abetted and caused violations of Section 204 of the Advisers Act and Rules 204-2(a)(10), 204-2(a)(14) and 204-3(c) promulgated thereunder.
4. Respondent Rudney Associates is an investment adviser which has been registered with the Commission since 2001, S.E.C. file number 801-60080. Rudney Associates, which manages approximately $150 million in client assets, is located in San Ramon, California.
5. Respondent Rudney is the president, director, and sole shareholder of Rudney Associates, an investment adviser registered with the Commission. He made all or virtually all the business and investment decisions for Rudney Associates. Rudney, 46, is a resident of Danville, California.
6. Rudney Associates is a discretionary investment manager. Client assets are primarily invested in no-load mutual funds through a national broker-dealer registered with the Commission. On or about January 2001, Rudney, then a registered representative of a different broker-dealer, decided to become an independent investment adviser. To that end, Rudney looked into what various broker-dealers, including TDW, had to offer. Rudney and representatives of TDW discussed the possibility that TDW would pay Rudney compensation in connection with the move, however no agreement was reached at that time.
7. Rudney Associates, through Rudney, eventually settled on TDW as the broker-dealer to whom Rudney Associates would direct client trades in March or April 2001. Rudney Associates began moving its clients' accounts to TDW. It also began generating and spending "soft dollar" credits for research, under a soft dollar arrangement with TDW. That soft dollar arrangement provided that Rudney Associates would receive $1 of soft dollar credit for every $10 of commissions that Rudney Associates' clients paid to execute trades through TDW.2
8. In August 2001, after agreeing to move its clients' accounts to TDW, Rudney Associates, through Rudney, approached a sales manager of TDW to ask if TDW would make funds available to help defray some of the costs of Rudney Associates' investment research.
9. On or about August 2, 2001, TDW agreed to make a one-time cash payment of $10,000 to Rudney Associates, to be revisited annually. At that time, the TDW sales manager informed Rudney Associates, through Rudney, that it was required to disclose this cash payment on Rudney Associates' Form ADV Part II.
10. In February 2002, Rudney Associates, through Rudney, approached the TDW sales manager to ask for a second payment to help with Rudney Associates' costs. On or about February 6, 2002, TDW agreed to provide an additional $10,000 cash payment to Rudney Associates.
11. In a Form ADV signed and filed with the Commission on March 15, 2002, Rudney Associates, through Rudney, omitted to state material facts required to be stated on Part II, Items 12B and 13A of the Form ADV. Specifically, Rudney Associates did not disclose that it had an arrangement whereby it had received $20,000 in cash from a non-client in connection with giving advice to clients, as required in Part II, Item 13A. In addition, Rudney Associates did not disclose that it had a soft-dollar arrangement as one of the factors considered in selecting TDW and in determining the reasonableness of its commissions as required in Part II, Item 12B.
12. Rudney Associates, through Rudney, failed to maintain required financial records and signed copies of client contracts. Rudney Associates, through Rudney, also failed to make annual offers of Form ADV Part II to its clients and failed to maintain a record of annual offers.
13. Sections 206(1) and 206(2) of the Advisers Act establish a fiduciary duty for investment advisers to act for the benefit of their clients. Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 17 (1979). Section 206(1) prohibits an investment adviser from employing any device, scheme, or artifice to defraud any client or prospective client; Section 206(2) makes it unlawful for an adviser to engage in any transaction, practice, or course of business that operates as a fraud or deceit upon any client or prospective client. Section 207 of the Advisers Act makes it unlawful for any person to willfully make any untrue statement of a material fact or omit to state any material fact required to be stated in a report filed with the Commission.
14. Taking cash from the broker-dealer which Rudney Associates had selected to house its clients' money created potential conflicts of interest between Rudney Associates and its clients. Similarly, Rudney Associates' clients were entitled to know about Rudney Associates' soft dollar arrangement with TDW. As a fiduciary, Rudney Associates and Rudney had an obligation to put their clients' interests ahead of their own. Instead, however, Rudney Associates and Rudney used the collective buying power of their clients' assets to benefit themselves financially. They thus compromised their ability to evaluate independently whether to choose, or to keep, TDW as the broker-dealer for their clients. In addition, Rudney Associates' Form ADV omitted to state the material fact that Rudney Associates had an arrangement whereby it had received $20,000 in cash from a non-client in connection with giving advice to clients.
15. Whether a client was actually harmed by an investment adviser's failure to disclose a potential conflict of interest is irrelevant. See SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 195, 84 S.Ct. 275, 11 L.Ed.2d 237 (1963). A fiduciary violates the antifraud provisions of the Advisers Act if it acts in a potential conflict situation without fully disclosing the potential conflict and getting its clients' consent to proceed.
16. Section 204 generally requires investment advisers to keep and maintain records as the Commission may prescribe by rules. Rule 204-3(c) requires investment advisers to furnish clients with a written disclosure statement containing certain information annually and Rule 204-2(a)(14) requires advisers to keep copies of statements sent to clients pursuant to Rule 204-3. Rule 204-2(a)(10) requires advisers to keep all written agreements (or copies thereof) entered into by advisers with any client. Rudney Associates did not properly maintain copies of written agreements with its clients as required by Section 204 and Rule 204-2(a)(10). Further, Rudney Associates did not send its clients the annual disclosure statement required by Section 204 and Rule 204-3(c) nor did it keep records of such disclosure statements as required by Section 204 and Rule 204-2(a)(14). Therefore, Rudney Associates willfully violated and Rudney willfully aided and abetted and caused violations of Section 204 of the Advisers Act and Rules 204-2(a)(10), 204-2(a)(14) and 204-3(c) promulgated thereunder.
In view of the foregoing, the Commission deems it appropriate to impose the sanctions specified in Respondents Rudney Associates' and Rudney's Offers.
Accordingly, it is hereby ORDERED:
A. Pursuant to Section 203(k) of the Advisers Act, that Respondent Rudney Associates cease and desist from committing or causing any violations and any future violations of Sections 204, 206(1), 206(2), and 207 of the Advisers Act and Rules 204-2(a)(10), 204-2(a)(14) and 204-3(c) promulgated thereunder;
B. Pursuant to Section 203(k) of the Advisers Act, that Respondent Rudney cease and desist from committing or causing any violations and any future violations of Sections 204, 206(1), 206(2), and 207 of the Advisers Act and Rules 204-2(a)(10), 204-2(a)(14) and 204-3(c) promulgated thereunder;
C. IT IS FURTHER ORDERED that Respondent Rudney Associates shall, within 90 days of the entry of this Order, pay disgorgement and prejudgment interest in the total amount of $22,330.84 to its advisory clients at the time of the conduct, through a distribution calculation not unacceptable to the staff of the Commission. Proof of such payment shall be submitted under cover letter that identifies Rudney Associates as a Respondent in these proceedings and the file number of these proceedings, to Helane L. Morrison, San Francisco District Office, Securities and Exchange Commission, 44 Montgomery Street, Suite 1100, San Francisco, CA 94104.
D. IT IS FURTHER ORDERED that Respondents Rudney and Rudney Associates shall, within 30 days of the entry of this Order, jointly and severally pay a civil money penalty in the amount of $40,000 to the United States Treasury. Such payment shall be: (A) made by United States postal money order, certified check, bank cashier's check or bank money order; (B) made payable to the Securities and Exchange Commission; (C) hand-delivered or mailed to the Office of Financial Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (D) submitted under cover letter that identifies Rudney and Rudney Associates as Respondents in these proceedings, the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Helane L. Morrison, San Francisco District Office, Securities and Exchange Commission, 44 Montgomery Street, Suite 1100, San Francisco, CA 94104.
E. Respondent Rudney Associates shall comply with the following undertakings:
1. Retain, within 60 days of the date of this Order, at its expense, an Independent Consultant, not unacceptable to the Commission's staff. Rudney Associates shall require the Independent Consultant to conduct a review of its compliance policies and procedures with respect to Sections 204, 206(1), 206(2), and 207 of the Advisers Act and Rules 204-2(a)(10), 204-2(a)(14) and 204-3(c) thereunder;
2. At the end of that review, which in no event shall be more than four months after the date of the issuance of this Order, Rudney Associates shall require the Independent Consultant to submit to Rudney Associates and to the Commission's San Francisco District Office a Consultant's Report. The Consultant's Report shall describe the review performed, the conclusions reached and shall include any recommendations deemed necessary to make the policies and procedures adequate. Rudney Associates may suggest an alternative procedure designed to achieve the same objective or purpose as that of the recommendation of the Independent Consultant. The Independent Consultant shall evaluate Rudney Associates' proposed alternative procedure. Rudney Associates, however, shall abide by the Independent Consultant's final recommendation;
3. Within six months of the date of this Order, Rudney Associates shall, in writing, advise the Independent Consultant and the Commission's San Francisco District Office of the recommendations it is adopting;
4. Rudney Associates shall take all necessary and appropriate steps to adopt and implement the recommendations contained in the Consultant's Report;
5. No later than twelve months after the date of the Independent Consultant's report, Rudney Associates shall submit to the Commission's San Francisco District Office an affidavit setting forth the details of its efforts to implement the Independent Consultant's recommendations as set forth in the Consultant's Report and its compliance with them;
6. For good cause shown and upon timely application by the Independent Consultant or Rudney Associates, the Commission's staff may extend any of the deadlines set forth in these undertakings; and
7. Rudney Associates shall require the Independent Consultant to enter into an agreement that provides that for the period of engagement and for a period of two years from completion of the engagement, the Independent Consultant shall not enter into any employment, consultant, attorney-client, auditing or other professional relationship with Rudney Associates, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity. The agreement will also provide that the Independent Consultant will require that any firm with which he/she is affiliated or of which he/she is a member, and any person engaged to assist the Independent Consultant in performance of his/her duties under this Order shall not, without prior written consent of an authorized representative of the San Francisco District Office of the Commission, enter into any employment, consultant, attorney-client, auditing or other professional relationship with Rudney Associates, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity as such for the period of the engagement and for a period of two years after the engagement.
By the Commission.
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