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SEC Opinion On Service Fees To Advisor

Suspends RIA for referral agreement disguised as service agreement

By John M. Baker, Esq.

Dec 10, 2001 – The Securities and Exchange Commission, in an opinion of the full Commission, recently sanctioned an investment adviser for poor service fee disclosure practices in its Form ADV. IMS/CPAs & Associates, Release Nos. 33-8031, 34-45019, IA-1994 (Nov. 5, 2001).

The investment adviser, like many advisers, received compensation from a fund sponsor for providing administrative support services to clients who invested in the funds. (The compensation actually was paid to an affiliate, but the SEC found the affiliate and the adviser to be for all practical purposes the same.)

In its Form ADV, however, the adviser represented that it did not recommend securities to clients in which it had a sales interest (Part I, Item 21); did not recommend to clients that they buy investment products in which the adviser had a financial interest (Part II, Item 9D); and did not have an arrangement whereby it received an economic benefit from a non-client in connection with giving advice to clients (Part II, Item 13A).

The adviser also warranted in its advisory contracts and engagement letters that it did not receive any commission or any payment from, or have any financial interest in, any recommendation made.

The SEC’s Division of Enforcement argued that the servicing agreement was simply a sham, and that the true purpose of the payments was to give the adviser fees for recommending the funds to its clients for investment. The SEC found that the adviser’s disclosures contained false statements concerning the adviser’s financial interest and economic benefit related to the recommendations, regardless of the true purpose of the servicing agreement. However, because of the adviser’s inability to show that any real work was done under the servicing agreement, the SEC also concluded that the payments under the servicing agreement were in the nature of fees or commissions for the referrals, rather than for any services performed under the agreement.

The SEC suspended the adviser and its control persons for six months and ordered disgorgement of the service fees to clients. Chairman Pitt abstained, although he participated for quorum purposes.

The SEC opinion is available online at

Copyright 2001, John M. Baker, Esq., Stradley, Ronon, Stevens & Young, LLP, 1220 19th Street, N.W., Suite 700, Washington, DC 20036 – (202) 822-9611- Fax (202) 822-0140 This article was originally posted to the FundLaw List, To subscribe to FundLaw, send a blank e-mail to

Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.  



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