The SEC on ADV Disclosure, Aaron Rodgers and the Robare Decision

Rodgers plays the part of the SEC, wielding a golf club when a simple flyswatter (or examination deficiency letter) would have sufficed. Robare is the fly, a small practice with no disciplinary history managing approximately $150 million on behalf of about 300 households. The golf club represents the enforcement mechanism of the SEC, with the gravitas to impose fines, sanctions, and generally affect the livelihood of those in its crosshairs. The shattered bay window and damaged truck are the collateral damage of the Commissioners’ decision, which are other advisers, chief compliance officers, and independent compliance consultants left to read tea leaves on what actually constitutes adequate ADV disclosure. And finally, the blaring truck alarm is a wakeup call to the advisory community: read the Robare decision its entirety and take time to appreciate its implications for your firm and your conflicts of interest disclosure.

Dramatic analogies notwithstanding, it’s my humble opinion that this was overkill. Below I’ve highlighted a few key takeaways and eyebrow-raising excerpts from the opinion itself: 

• The Commissioners imposed the maximum “second-tier” penalty on the two individuals named in the matter because their actions involved “fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement,” “given the serious nature of the violations,” and because there was a “fundamental breach of their fiduciary duties to clients.” Them’s fightin’ words.

• Importantly, the Commissioners did not find that the individuals named acted with scienter; that is, there was no intent to deceive, manipulate, or defraud. As such, there was no violation of Section 206(1) of the Advisers Act. However, they did conclude that the individuals named acted with negligence, which is enough to trigger a violation of Section 206(2) of the Advisers Act. Simple negligence is enough to trigger a fraud charge.

• In his partial dissent, Commissioner Piwowar noted that no clients were actually harmed, Robare did not receive any ill-gotten gains, neither the firm nor the individuals were recidivist offenders, and no other overarching canons of justice called for the imposition of penalties. Though he disagreed with the imposition of a civil penalty, he agreed Robare committed fraud and therefore concurred with the opinion.

• Robare’s broker-dealer received a cut of the payments from the custodian to Robare. The broker-dealer is not named as a party in the proceeding. This highlights the fiduciary disclosure obligations of advisers in contrast to the lack thereof for broker-dealers (new DOL fiduciary rules notwithstanding).

• The CCO of Robare’s broker-dealer and multiple independent compliance consulting firm principals Robare had hired were called to testify as to their involvement with helping to draft the ADV. Compliance professionals – captive and independent – should take note; your involvement with an independent adviser’s ADV may very well earn you a spot on the witness stand if that adviser’s ADV is later called into question. Query the implications if the SEC imposes the rumored third-party exam requirement.

• A prior SEC examination that resulted in a “no further action letter” was deemed irrelevant. There is no implied “stamp of approval” if an adviser survives an SEC examination without a referral to enforcement. 

• The fact that the monetary value of the custodial payments to Robare were immaterial in relation to the business’ overall income was also deemed irrelevant. The fact that the arrangement with the custodian existed at all is what matters. 

• The Commissioners took the position that Robare’s ADV disclosure “plainly failed” and was “obviously” inadequate. I interpret this to mean the Commissioners believe the sufficiency of ADV disclosure to be a black and white issue. Considering how many professionals were involved in drafting the multiple iterations of Robare’s ADV over the years to try to get it right, finding the right disclosure words seems to be more art than science.

• Reliance on third-party compliance consultants does not afford the same defense as reliance on legal counsel… or at least there were no cases cited that could have provided a precedent upon which to rely. To even have a chance of using the reliance defense, “a defendant must demonstrate that he made complete disclosure to counsel, sought advice as to the legality of his conduct, received advice that his conduct was legal, and relied on that advice in good faith.” In this matter, there simply wasn’t enough documentary evidence or convincing testimony to support justifiable reliance. The takeaway here is to thoroughly and specifically document communications with compliance consultants when you seek and receive their advice. 

• In finding that one of the individuals named caused the violations under the anti-fraud provisions of the Advisers Act, the Commissioners partially attributed such a finding to the fact that he signed the Form ADV upon filing. He/she who signs the ADV carries responsibility and potential liability. Talk about a hot potato.

There is still the possibility that Robare will appeal the decision to the Fifth Circuit Court of Appeals, so there’s a possibility that the last chapter has yet to be written. Until then, the decision stands and all advisers would do well to meticulously review and understand all potential conflicts of interest, thoroughly and specifically disclose them in Form ADV, and create an organized paper trail of any professional advice sought and received along the way.