Investment Adviser Permanently Barred over Conflicts of Interest, Failure to Disclose, and Violation of Best Execution Rules

I previously wrote about the SEC’s increased emphasis on the enforcement of an investment advisor’s obligation to provide its customers with the “best execution” of recommended securities trades. See SEC Announces Results of Share Class Selection Disclosure Initiative (March 19, 2019). A recent court decision, from the Tenth Circuit Court of Appeals, illustrates the serious consequences that can result from an adviser’s failure to do so.

In Malouf v. Securities and Exchange Commission, Case No. 16-9546 (10th Cir. August 13, 2019), the United States Tenth Circuit Court of Appeals upheld the SEC’s decision to permanently bar an investment advisor when he sold the broker-dealer he owned due to conflicts of interest, maintained undisclosed financial relationship with that firm, and used the firm to execute trades for his clients at inflated commissions.

The adviser, Dennis Malouf, occupied key positions at two firms. One firm, UASNM, Inc., was a registered investment advisor under the Investment Advisers Act of 1940. The other firm was his branch of Raymond James Financial Services, a broker-dealer. Mr. Malouf sold his interest in the branch office after Raymond James became concerned about the possibility of a conflict of interest involving Mr. Malouf’s dual roles. But Mr. Malouf’s sale of the branch office did not resolve the conflict because, under the terms of the sale, Mr. Malouf was to receive 40% of the securities-related fees that the branch collected over four-years. Therefore, Mr. Malouf had an incentive to use the Raymond James branch to execute securities trades for his UASNM. Which he did. As a result, the new owner of the Raymond James branch received money that was used to pay to Mr. Malouf.

Not surprisingly, the SEC determined that there were problems with this arrangement. Mr. Malouf failed to take reasonable steps to ensure that his clients received the best available execution for their bond transactions. In fact, according to an expert, the typical commission charged by Raymond James for the bond trades was two to three times higher than the industry average. UASNM’s Form ADV advised customers that the firm had no conflicts of interest and was not updated to disclose Mr. Malouf’s conflict of interest. The court upheld the SEC’s sanctions against Mr. Malouf based on the findings of the Administrative Law Judge who conducted the evidentiary hearing. Those sanctions included Mr. Malouf’s permanent bar from the securities industry and an order that he disgorge $562,001.26 and prejudgment interest.

© Andrew Whiteman 2019


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