The Securities and Exchange Commission (SEC) criticized the structure of the compliance program in place at a Texas-based investment adviser as part of a lawsuit against the firm and one of its former representatives.
The Advisor Resource Council (ARC) was charged in a complaint filed by the SEC on Friday. The firm was accused of making false and misleading statements in its Form ADV brochures and failing to adopt policies and procedures to ensure fair and equitable trade allocations among its advisory clients.
The SEC also charged Steven Jacobson regarding his alleged role in a cherry-picking scheme. Jacobson was a representative associated with ARC from October 2019 until he was terminated in January 2021.
The details: From July 2020 to October 2020, Jacobson’s alleged scheme saw him disproportionately allocate option trades with positive returns to himself and certain favored clients, including his mother, and negative returns to other clients.
ARC did not adequately monitor Jacobson’s trading activity, according to the SEC. The firm did not follow its policies that all allocations be reviewed to ensure no clients were disadvantaged. Further, its Form ADV disclosures to clients were made false and misleading because of Jacobson’s alleged actions, the SEC said.
The alleged scheme came to an end in October 2020 after TD Ameritrade, the custodian for the accounts Jacobson managed, launched an investigation into his dealings and barred him from its platform. ARC’s chief compliance officer then reviewed Jacobson’s trading activity and noted the suspicious activity, though Jacobson was allowed to continue managing client assets, the SEC alleged.
Compliance considerations: In 2019, ARC had 74 independent adviser representatives spread across approximately 40 branch offices in multiple states, the SEC noted in its complaint. The representatives were supervised by only three compliance staff located in Dallas.
The agency noted stress on the small compliance staff regarding the firm’s business model. ARC was further criticized for employing a system that relied on broker-dealer alerts for monitoring trading for clients on the TD Ameritrade platform.
The SEC’s complaint seeks disgorgement and civil penalties to be paid by ARC and Jacobson.
ARC did not respond to a request for comment.