Disclosure of conflicts is a cornerstone is a cornerstone of the regulation of investment adviser. 3D/L Capital Management clearly came up short.
3D/L entered into an arrangement with an ETF manager that would provide a revenue share to 3D/L they labeled an “onboarding fee.” The SEC complaint points out that the onboarding fee creates a conflict, by incentivizing 3D/L to allocate client money to those ETF funds. 3D/L failed to disclose the onboarding fee for two years.
Then 3D/L revised its Form ADV Part 2. The SEC was not happy with the wording of the disclosure.
The ETF Manager had paid an “onboarding fee to make ETFs available for inclusion in 3D/L’s composite portfolios.” While this disclosure exposed the existence of the fee, it further stated that “[t]his [p]rogram may create a potential conflict of interest.”
(My emphasis)
The SEC stated that this was inadequate because there was an actual conflict of interest.
The SEC seemed happier when 3D/L revised its Form ADV to “onboarding fee . . . results in a conflict of interest.”
Lawyers love the word “may”. (speaking as one) The SEC does not like the word “may.”
Sources:
- SEC Charges Connecticut-Based Investment Adviser 3D/L Capital Management, LLC, with Failing to Fully and Fairly Disclose Conflicts of Interest, Orders It to Pay Harmed Clients
- Order – 3D/L Capital Management, LLC
- The SEC Continues its Attack on the Word “May”
- “May” Can Be a Failure to Disclose
- The One That “May” Pay Commissions
- “May” May Not Be Adequate Disclosure
