(Article from Registered Funds Regulatory Update, April 2022)
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The SEC settled charges against O.N. Investment Management Company (“ONIMCO”), a registered investment adviser, for breaching its fiduciary duty for failing to disclose conflicts of interests with its parent company, a registered broker-dealer. Specifically, the Order found that ONIMCO had been generating revenue for O.N. Equity Sales Company (“ONESCO”) through its advisory clients without fully and fairly disclosing all material facts.
The Order found that since 2014, ONIMCO advised its clients to purchase or hold mutual fund share classes that charged Rule 12b-1 fees that were paid to ONESCO when lower cost shares of the same funds were available to them. As a result, ONESCO collected 12b-1 fees that it would not have otherwise collected if the clients had been placed in lower-fee share classes. During the same time period, ONIMCO predominantly recommended that its clients use certain money market funds for cash sweep whereby the clearing broker paid ONESCO revenue sharing payments. However, there were other money market funds available that would have paid ONIMCO’s clients higher yields for lower fees but without the revenue sharing component. The Order found there were similar issues with a no-transaction fee program offered by an unaffiliated clearing broker that provided ONIMCO access to certain mutual funds where the clearing broker shared no-transaction fee revenue with ONESCO for ONIMCO advisory client assets.
The Order further noted that ONIMCO failed to adopt and implement policies reasonably designed to prevent violations of the federal securities laws with regard to its mutual fund share class and fund selection practices. The Order found that ONIMCO willfully violated Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-7 thereunder. Without admitting or denying the findings, ONIMCO agreed to, among other things, pay disgorgement of $866,257 plus interest and a civil monetary penalty of $210,000.
O.N. Inv. Mgmt. Co., SEC Admin. Proc. File No. 3- 20701 (Jan. 11, 2022).