Recent Investment Advisers Act Case Provides Window into New SEC Priorities

Summary:

On February 15, 2025, the Securities and Exchange Commission (“SEC”) settled an administrative proceeding with a retail investment adviser[1] for IAA Section 206(2), Rule 206(4)-7 and Rule 204-3, which requires the delivery of Form ADV to clients.  This case is particularly significant as it marks the first IA Act enforcement action under the new administration, providing insight into the potential regulatory and enforcement priorities for the next four years.

Allegations and Conduct:

1. Fiduciary Duty: The investment adviser and one of its representatives violated their fiduciary duty by improperly converting more than 180 brokerage accounts—primarily low activity accounts with minimal trading activity and low revenue—into investment advisory accounts. These accounts belonged to retail investors, including some elderly clients. As a result of these improper conversions, the investment adviser generated an additional $268,000 in revenue, with 75% of that amount retained by the representative involved.
2. Policies:  
   • Fee Schedules – The adviser’s written compliance policies required obtaining fully completed investment management agreements before charging advisory fees. Additionally, the policies mandated periodic reviews of fee schedules and accuracy testing of client fees. However, the representative failed to provide fee schedules for 60 of the converted accounts and submitted incomplete schedules for several others.
   • Form ADV – The adviser’s written compliance policies, and SEC rules, required delivering Form ADV Part 2A to clients before providing advisory services. However, this requirement was not met.

Takeaways:

• Roadmap to Future Law Enforcement Activity: This case is reminiscent of enforcement cases brought under the Clayton administration signaling that the new administration will maintain a strong focus on enforcement but may shift the nature of the cases it pursues.  Below is an analysis of the similarities and differences between this case, and the environment it signals, and the cases brought by the Gensler Commission.
  • Differences from the Gensler Commission Practices: This case stands apart from enforcement actions brought under the Gensler-led SEC in several key ways.
    • Focus on Retail Investors: The victims in this case were sympathetic retail investors, including elderly individuals, making investor protection a clear priority.  Gensler-era cases were often focused on large Wall Street investment managers.
    • Charging Individuals: Both the investment adviser and the representative involved in the misconduct were charged, whereas many Gensler-era cases focused on firms rather than individuals.
    • Clear Fraud Component: Unlike some Gensler-era cases where no obvious fraud occurred, this case involved clear deception, resulting in direct financial harm to investors.
    • Simplicity and Clarity: The case is straightforward, involving clear misconduct without the complexity often seen in institutional investor cases. Many past cases lacked this level of clarity.
  • Continuities with the Gensler Commission Practices: Despite these differences, this case demonstrates an ongoing commitment to longstanding enforcement strategies that prioritize compliance programs.
    • Emphasis on Policies and Procedures: Similar to Gensler-era cases, this action underscores the importance of adhering to written internal compliance policies and procedures. Ensuring firms follow their own rules appears to remain a key enforcement theme.
    • Negligence Standard And Fiduciary Duty: The SEC pursued this case based on a negligence standard, rather than requiring proof of intent. The order also referenced fiduciary duty violations when describing the misconduct. These points indicate that enforcement cases can proceed without needing to meet a significantly higher standard of proof.
    • Technical Violations Still in Focus: The inclusion of Rule 204-3 as a charge, even though it was secondary to more serious violations, suggests that the SEC will continue to pursue cases involving technical regulatory infractions. This indicates that strict adherence to compliance rules will remain a priority.

This case offers a preview of the enforcement landscape under the new administration, balancing a continued focus on compliance with a shift toward cases that are clearer, involve retail investor harm, and hold individuals accountable.

¹ In the Matter of One Oak Capital Management, LLC and Michael Derosa