Washington , D.C. , Sept. 21, 2004 LAWFUEL – Best for SEC, attorney news, legal, law, law firm news & legal research – The Securities and Exchange Commission today filed settled civil charges against TD Waterhouse Investor Services, Inc., a national brokerage firm, for making undisclosed cash payments to three investment advisers to encourage them to use TD Waterhouse for their clients’ brokerage business. In settling the matter, TD Waterhouse agreed to pay a $2 million penalty, among other remedies. The Commission also announced related fraud actions against the three investment advisers and their principals for their failures to disclose the cash payments.
The Commission’s Order finds that TD Waterhouse knew its payments created potential conflicts of interest between the advisers and their clients. Each adviser that received compensation from TD Waterhouse compromised its ability to evaluate independently whether to recommend that its clients use TD Waterhouse to handle the clients’ brokerage business. TD Waterhouse, which recognized that the advisers were required by law to disclose these conflicts to their clients, adopted written procedures that required TD Waterhouse personnel to ensure that the advisers made the proper disclosures, yet the firm failed to follow these procedures.
TD Waterhouse made the payments to the advisers from its profits on the advisory clients’ brokerage business. The payments, however, did not directly benefit the advisers’ clients. Instead, the advisers used the money for their own purposes.
The three registered independent investment advisers who received the payments are: Kiely Financial Services, Inc., based in Greenville , N.C. Rudney Associates, Inc., of San Ramon , Calif. , and Brandt, Kelly & Simmons, LLC, of Southfield , Mich.
“By creating these serious conflicts of interest, TD Waterhouse’s undisclosed cash payments carried the potential to corrupt the fiduciary relationship between an investment adviser and its clients,” said Helane L. Morrison, District Administrator of the SEC’s San Francisco Office.
Added Michael Dicke, Deputy Assistant District Administrator of the SEC’s San Francisco Office, “The investment advisers and their principals put their own interests ahead of their clients’ interests by accepting TD Waterhouse’s compensation without full disclosure to their advisory clients.”
New York-based TD Waterhouse , without admitting or denying the Commission’s findings, has agreed to cease and desist from committing or causing violations of Section 206(2) of the Investment Advisers Act of 1940, an anti-fraud provision, and Section 207 of the Investment Advisers Act, a disclosure provision. It will also pay a $2 million civil penalty and receive a Commission censure.
Two of the investment advisers named in the Commission’s actions have also agreed to settle the charges without admitting or denying the findings. Kiely Financial and its principal, Joseph K. Kiely, have agreed to disgorge the money they received from TD Waterhouse, plus interest-an amount totaling $54,256. They also agreed to pay a $100,000 civil penalty and to cease and desist from committing or causing violations of Sections 206(1), 206(2), and 207 of the Investment Advisers Act. Rudney Associates and its principal, Eric A. Rudney, have agreed to disgorge the money they received from TD Waterhouse, plus interest-an amount totaling $22,331. They also agreed to pay a $40,000 penalty and to cease and desist from committing or causing violations of Sections 206(1), 206(2), and 207 of the Investment Advisers Act.
Finally, the Commission instituted litigated administrative and cease-and-desist proceedings against Brandt, Kelly & Simmons and its principal, Kenneth G. Brandt. The Order Instituting Proceedings alleges that the firm agreed to distribute a $7,500 cash payment from TD Waterhouse to its advisory clients to compensate them for fees they incurred when moving their accounts from another broker to TD Waterhouse. The Order alleges that the respondents did not inform their clients of the payment, but rather fraudulently misappropriated the money for their own uses. The Order alleges, among other things, that Brandt, Kelly & Simmons and Kenneth Brandt violated Sections 206(1) and 206(2) of the Advisers Act, and that Brandt, Kelly & Simmons also violated Section 207 of the Advisers Act.