Enforcement News: SEC Brings Enforcement Action Against Investment Adviser and Firm for Not Disclosing Increased Fees

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Posted on: Feb 26 2025

An investment adviser is a fiduciary, and as such is held to the highest standard of conduct and must act in the best interest of his/her client.[1] This means, among other things, that an investment adviser has an affirmative duty of utmost good faith and full and fair disclosure of all material facts.[2] In broad terms, an investment adviser owes its client the duty of care, loyalty, and candor.

The duty of care includes, among other things, the duty to provide advice that is suitable and in the best interest of the client. This duty requires an investment adviser to make a reasonable inquiry into his/her client’s financial situation, level of financial sophistication, investment experience, and investment objectives. It also requires the investment adviser to provide personalized advice that is suitable for and in the best interest of the client based on the client’s investment profile.

The duty of loyalty requires an investment adviser to put his/her client’s interests first. An investment adviser must not favor his/her own interests over those of a client or unfairly favor one client over another. In seeking to meet this duty, an investment adviser must make full and fair disclosure to his/her clients of all material facts relating to the relationship. Additionally, an investment adviser must seek to avoid conflicts of interest with his/her clients, and, at a minimum, make full and fair disclosure of all material conflicts of interest that could affect the advisory relationship. The disclosure must be clear and detailed enough for a client to make a reasonably informed decision to consent to such practices, strategies, or conflicts or reject them. An adviser disclosing that it “may” have a conflict is not adequate disclosure when the conflict actually exists.

In The Matter of One Oak Capital Management, LLC and Michael DeRosa

On February 14, 2025, the Securities and Exchange Commission (“SEC”) announced (here) that it settled charges against New York-based registered investment adviser One Oak Capital Management LLC (“One Oak”), and a former investment adviser representative, for misconduct related to advisory services provided to their retail clients.

According to the SEC, from approximately June 2020 through October 2023, respondents failed to adequately disclose advisory fees to certain clients converting their brokerage accounts at an unaffiliated broker-dealer to advisory accounts at One Oak (the “Converted Accounts”). As a result of these conversions, said the SEC, respondents charged the Converted Accounts advisory fees based on a percentage of assets under management, rather than just brokerage commissions, as they were previously charged by the broker-dealer. Because the Converted Accounts had relatively little trading activity before and after the conversions, said the SEC, the change in fee structure resulted in significantly increased costs for clients, even though those clients generally received no additional services or benefits. Therefore, alleged the SEC, respondents placed their financial interests ahead of the interests of the prospective clients in recommending the conversions.

In addition, the SEC alleged that the investments were not suitable for respondents’ clients. The SEC said that respondents did not adequately consider whether, in light of the clients’ investment profiles and the characteristics of the accounts at issue, their recommendation to convert their brokerage accounts to advisory accounts was in their clients’ best interests.

According to the SEC, One Oak’s chief compliance officer did not have access to sufficient information about the clients of the Converted Accounts with which to evaluate the suitability of their specific investments, other than the clients’ age, because respondents generally did not obtain information from clients regarding their investment objectives or risk tolerance in writing. For at least the first four months after certain accounts were converted in 2020, claimed the SEC, no one at One Oak other than respondent was able to view the account activity to conduct any review whatsoever. The SEC also alleged that respondent did not fulfill his fiduciary duty of care because he did not conduct meaningful reviews of whether the Converted Accounts were suitable to be advisory accounts.

The SEC found that respondents willfully violated the antifraud provisions of Section 206(2) of the Investment Advisers Act of 1940 (“Advisers Act”) and that One Oak also violated the compliance rule provisions of the Advisers Act. Without admitting or denying the SEC’s findings, One Oak consented to an order requiring it to pay a civil penalty of $150,000 and to retain an independent compliance consultant to review certain of its policies and procedures related to its retail business. Without admitting or denying the findings in the order, the former investment adviser agreed to a civil penalty of $75,000 and a nine-month industry suspension.

A copy of the SEC’s order instituting administrative and cease-and-desist proceedings can be found here.

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Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

[1] SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 194 (1963).

[2] Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 17 (1979).