Adviser gets a rare win over the SEC in mutual fund case

In-house judge rules against the agency in closely watched case over payments by a custodian for fund sales

Jun 8, 2015 @ 1:21 pm

By Trevor Hunnicutt

A Houston-based financial-advice firm has won a rare victory over the Securities and Exchange Commission — before one of the agency's own judges — in a case spotlighting the legal challenges facing advisers who accept payments from brokerage firms.

SEC Administrative Law Judge James E. Grimes dismissed allegations that the advice firm, The Robare Group, and two of its owners, broke the law by not sufficiently disclosing a financial relationship with Fidelity Investments. Fidelity, the firm's custodian, pays Robare to distribute certain third-party mutual funds.

In a 44-page decision filed June 4, Mr. Grimes wrote that the owners, advisers Mark L. Robare and his son-in-law Jack L. Jones Jr., “came across as honest and committed to meeting their disclosure requirements,” including relying on their broker-dealer and compliance advisers.

“In listening to Mr. Robare and Mr. Jones testify and observing their demeanor under cross-examination, it is difficult to imagine them trying to defraud anyone, let alone their investment clients,” wrote the judge, who heard their testimony in February.

The decision, which can be appealed before it becomes final, is one of few losses by the SEC in court-like proceedings it administers. The regulator has the authority to bring some cases in its own hearings as well as in traditional, civil court trials.


The agency is facing a gathering thunder of criticism from politicians and securities lawyers, as well as former SEC commissioners and staff members. Some say the increasing practice of relying on its own judges comes at a cost to defendants, who lose cases more often during in-house proceedings than in cases taken to trial.

“This may reflect, in part, an [administrative law judge's] sensitivity to recent allegations that ALJs are SEC lapdogs,” Mercer Bullard, a former SEC lawyer who now directs the Business Law Institute at the University of Mississippi School of Law, wrote in an email. “If the defendants' conduct was not at least negligent, I don't know what would be.”

A spokeswoman for the SEC, Judith A. Burns, said the agency is reviewing the decision.

Since 2004, the Robare Group has been enrolled in a program in which Fidelity pays a share of the revenue it earns on some third-party mutual fund sales to the advisers who sell the funds. The funds are also made available to the advisers without transaction fees.

Transaction-free platforms are popular with advisers and lucrative for custodians, who receive payments from fund companies to participate. Custodians sometimes pay financial advisers who participate.

But Fidelity does not describe the payments as a commission; instead it calls them compensation for “shareholder administrative services.” That's despite the fact that advisers provide the exact same services to other funds not enrolled in the program.


Robare disclosed those payments in vague language that referred to commissions and sales-related payments in its Form ADV, a filing with regulators that's made available to clients, and separately provided disclosures to new clients a Fidelity document that more explicitly acknowledged the payments. But Fidelity determined the firm's own disclosures were inadequate and told it to update its filings in 2011.

A Fidelity spokeswoman, Erica Birke, declined to comment.

The judge said the evidence didn't suggest the advisers were acting fraudulently. He noted that a high percentage of their clients' assets were in funds not offering revenue-sharing, including, at times, Fidelity-managed index funds. Robare manages $160 million for clients.

“To come away with as clean a victory as we did was very rewarding,” said Alan M. Wolper, a lawyer at Ulmer & Berne, who represented the advisers. “To settle this case they would have had to admit that they committed fraud, and they just couldn't stomach that.”

Mr. Wolper said deciding what and how much to disclose is a “moving target” for advisory firms. While the advisers argued that the disclosures of the Fidelity payments were not “material,” the judge did disagree.

The chief compliance officer for Robare's broker-dealer, Triad Advisors Inc., and another compliance adviser to broker-dealers testified “without contradiction,” that “advisers operate in a difficult environment that presents challenges for even experienced compliance professionals,” the judge said. Regulators had argued that the advisers could not rely on Triad's guidance “in good faith” because Triad is not independent and disinterested, according to the decision.

An external publicist representing Triad did not respond to an emailed request for comment.


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