The SEC announced that it has filed settled charges against New York-based One Oak Capital Management LLC and its former investment adviser representative, Michael DeRosa. The charges are related to misconduct concerning advisory services provided to their retail clients.

The SEC’s investigation established that from June 2020 to October 2023, One Oak and DeRosa advised DeRosa’s customers at an unaffiliated broker-dealer, where he was also employed, to convert more than 180 brokerage accounts to advisory accounts at One Oak.

The majority of the customers were elderly and had been DeRosa’s long-term clients at the broker-dealer, which charged them on a commission basis.

The order outlines that One Oak and DeRosa neglected their fiduciary duty, failing to sufficiently disclose that the conversions from brokerage accounts to advisory accounts would result in significantly higher fees for the clients as well as increased compensation for DeRosa. The SEC alleged that they did not, in any way, disclose the conflict of interest resulting from this arrangement either.

Despite the fact that the change in fee structure led to substantially increased costs, the clients generally received no additional services or benefits.

One Oak and DeRosa also failed to adequately consider if it was in their clients’ best interests to convert their brokerage accounts to advisory accounts, the SEC stated. In fact, many of the accounts were not suitable to be advisory accounts, the order notes.

Charges

The SEC’s order determined that One Oak’s and DeRosa’s breach of their fiduciary duty owed to clients caused them to intentionally violate the antifraud provisions of SEC Rule 206(4)-1 under Section 206(4) of the Investment Advisers Act of 1940.

Additionally, One Oak violated the compliance program rule provisions of the Advisers Act, SEC Rule 206(4)-7.

Without admitting or denying the SEC’s findings, One Oak agreed to a civil penalty of $150,000 and will have to retain an independent compliance consultant to review certain of its policies and procedures related to its retail business.

Similarly, without admitting or denying the findings in the order, DeRosa agreed to a civil penalty of $75,000 along with a nine-month industry suspension.

Fiduciary duty cases abound

The SEC interprets investment adviser fiduciary duty to include a requirement for a duty of care and a duty of loyalty on the part of registered advisers. The duty of care is a duty to provide advice that is in the client’s best Interest, which encompasses the effort to seek best execution, plus act and provide advice and monitoring over the course of the business relationship.

Admittedly, significant effort goes into this – as the adviser needs to understand a lot about each client’s financial situation, goals and risk tolerance, plus provide oversight so the adviser knows the financial plans are on track – and remain in the client’s best interest – even amid changing market conditions and new corporate products, fees or other internal practices.

The duty has been construed broadly and used to discipline firms in a variety of difference scenarios and fact patterns.

Last August, in an SEC complaint, the agency said a firm that manages and provides investment advisory services to at least four private investment funds misrepresented to investors that these funds were audited annually by an independent auditor. The complaint said that the business and its principal did not correct their ongoing misstatements to investors, despite knowing that the funds were not actually audited by the auditor they had engaged. 

Also in August, the SEC looked into allegations that several prominent Wall Street players were cheating customers out of billions of dollars of interest payments.

The probe focused on whether banks or brokers steered clients toward sweep accounts that paid little or no interest, and whether the companies’ financial advisers had a fiduciary duty to tell clients they could make higher returns by moving their cash into other accounts.

Another settlement action in September resolved fraud charges at a prominent investment adviser firm relating to overvalued assets and illegal cross trades that, according to the SEC, unfairly benefitted some clients while disadvantaging others.

In that case, the SEC pointed out that using a third-party pricing service did not negate the adviser’s obligation to value assets accurately.