One Oak Capital Management, LLC and a former adviser representative will have to pay $225,000 in civil penalties for improperly switching clients from brokerage to advisory accounts that brought in much higher fees and were not in the best interests of clients.
According to an SEC announcement posted Feb. 14, veteran investment advisor Michael DeRosa,75, converted more than 180 accounts of his customers at an unaffiliated broker-dealership into advisory accounts at One Oak without telling customers they would lose the low-cost commission structure of a brokerage account and pay fees seven to 10 times higher to One Oak than they paid to the broker-dealer.
The settlement is among the first aimed directly at a registered fund adviser following a change in presidential administration, the resignation of controversial former SEC chair Gary Gensler and the beginning of what industry experts predicted would be a much less intense focus on enforcement at the SEC.
Those changes, which include a reported change in policy under which the SEC Enforcement Division must get permission from SEC commissioners rather than senior staff before launching major investigations, have resulted in a wave of resignations among senior-level SEC staffers, including the director and assistant director of the SEC Division of Enforcement.
Other high-level changes in priority prompted the agency to launch a task force to look into the development of crypto markets that were anathema under Gensler, and the decision by acting chair Mark Uyeda to back off the SEC’s defense of litigation opposing the climate-risk disclosure rule that became a lightning rod for intense opposition to SEC regulation under the previous administration.
None of the industry experts predicting a reduction in what Gensler opponents called “regulation by enforcement” included the assumption that the SEC would end up giving a pass to companies defrauding or acting against the best interests of investors, however.
“You can probably expect new rules will come out at a slower pace, but I wouldn’t expect any real change in the approach to enforcement of rules that already exist, certainly not for fraud or other clear violations,” Carolyn McPhillips, president of the Mutual Fund Directors Forum told Fund Directions shortly after former SEC commissioner Paul Atkins was nominated as the new SEC chair in January.
Fiduciary failure
The One Oak charges stem from a failure of traditional fiduciary responsibility, however, according to the SEC, not a change in political or enforcement priorities.
“One Oak and DeRosa converted brokerage accounts to advisory accounts when it benefitted them through higher fees, but that conversion was not in their clients’ best interests,” according toa statement in the announcement from Tejal D. Shah, associate regional director of the New York Regional Office.
One Oak took in approximately $268,000 in fees from the targeted accounts, of which approximately 75% went to DeRosa in commissions, according to SEC charges.
DeRosa and One Oak failed in their fiduciary duty to clients by failing to disclose the adviser’s conflict of interest or a significant increase in fees without significant benefit or additional services for the accounts, many of which “were not suitable to be advisory accounts,” according to the SEC.
The SEC imposed civil penalties totaling $225,000. One Oak agreed to pay $150,000 in civil penalties and to hire an independent consultant to review its retail-investor policies. DeRosa agreed to a nine-month suspension and $75,000 in civil penalties. Neither admitted or denied the SEC charges.
One Oak manages approximately $283 million in assets. The SEC has no other SEC charges on DeRosa’s record from 33 years in the investment business.
