- Adviser’s Best Execution Failures Result in SEC Enforcement Action
- October 31, 2013 | Authors: Michael G. Dana; Peter D. Fetzer; Terry D. Nelson
- Law Firms: Foley & Lardner LLP - Miami Office ; Foley & Lardner LLP - Milwaukee Office ; Foley & Lardner LLP - Madison Office
In a recent action, the SEC instituted a cease and desist proceeding against Manarin Investment Counsel, Ltd., an SEC registered investment adviser located in Omaha, Nebraska (the “Adviser”), its affiliated broker-dealer, Manarin Securities Corp. and their founder, owner and President Roland R. Manarin (Investment Advisers Act of 1940 Release No. 3686, October 2, 2013). This enforcement action is based on violations under the Investment Advisers Act of 1940, the Investment Company Act of 1940 and the Securities Exchange Act of 1934 by the respondents in connection with, among other things, failure to ensure best execution of trades for various funds managed by the Adviser.
The SEC’s enforcement action is based on the SEC’s findings that the Adviser breached its fiduciary duties as investment adviser to the funds during the period of 2000-2010 by using the funds to purchase Class A shares of underlying mutual funds although the funds were eligible to purchase lower cost institutional shares of the same mutual funds. The result of this fiduciary failure by the Adviser was that the managed funds paid ongoing 12b-1 fees on their mutual fund holdings which were realized by the Adviser’s affiliated broker-dealer. In addition, the affiliated broker-dealer for a period of at least three years charged its affiliated mutual funds commissions that were in excess of the usual and customary broker’s commissions on transactions effected on a securities exchange.
Section 206 of the Advisers Act imposes on an investment adviser a fiduciary duty to act in the best interest of its clients. That duty includes the investment adviser’s obligation to seek best execution for transactions in client accounts. Best execution generally means seeking the most favorable terms under the circumstances. Because the Adviser in this case, caused the funds to purchase Class A shares rather than the available, institutional class shares, the funds, collectively, paid approximately $3.3 million more in 12b-1 fees during the period of 2000-2010. Those additional and avoidable fees were paid by the funds and passed through to its investors.
In addition, within the Adviser’s disclosure to investors in the funds, it caused disclosure to the effect that the funds would act to ensure best execution in trades for the funds. The Adviser’s Form ADV also disclosed to clients that it would be acting to obtain best execution at all times for its clients. Those material misrepresentations by the Adviser to fund investors, clients and prospective clients are violations of Section 206 under the Advisers Act.
The SEC’s actions to resolve the administrative matter, which were agreed to by the respondents, orders: the respondents to cease and desist from any further violations of the Advisers Act, Investment Company Act of 1940, and Section 17(a) of the Securities Act of 1933; the imposition of a censure on both the adviser and affiliated broker-dealer; such entities to pay collectively $685,006 in disgorgement with prejudgment interest of $267,741; and the Adviser to pay a civil penalty of $100,000.