An investment advisory firm is being sanctioned in a settlement with the U.S. Securities and Exchange Commission (SEC) for failing to disclose a conflict of interest involving client referrals.
The regulator filed settled charges against Zoe Financial, a New York-based advisory firm, for allegedly breaching its fiduciary duty by not properly disclosing a conflict to clients and potential clients.
According to the SEC’s order, starting in 2018, the firm operated an algorithmic matching service for referring clients to third-party advisors. And, in January 2023, it also launched a turnkey asset management platform for advisors, known as Zoe Wealth.
The SEC alleged that, after the launch of the new platform, Zoe Financial failed to properly disclose that it had an economic incentive to refer clients to advisors that were using the new Zoe Wealth platform.
While the algorithm didn’t factor in whether the advisors it recommended used the platform, the firm’s salespeople were able to consider that fact in follow-up conversations with clients that didn’t find a match through the algorithm, the regulator said.
As a result, the SEC found that Zoe Financial violated its fiduciary duty to those clients.
“Investment advisors have a fiduciary obligation to fully and fairly disclose material conflicts of interest,” said Sheldon Pollock, associate director of the SEC’s New York office, in a release.
“Advisors must live up to those disclosure obligations in all aspects of their advisory services, including when they offer a new technology or new feature to their clients,” he added.
The firm agreed to settle the case without admitting the regulator’s allegations.
Under the settlement, it agreed to pay a US$450,000 penalty, to be censured and to cease and desist from further violations.
The SEC said that, in deciding to accept the settlement, the regulator considered that the firm had beefed up its compliance policies and hired a full-time chief compliance officer.