The US Securities and Exchange Commission has fined Harbour Investments for failing to tell its advisory clients about compensation it received under a marketing services agreement with a third-party broker-dealer that provided it with custody and clearing services, along with information about the conflicts of interest that arose from that compensation.

Harbour, a hybrid advisory and independent brokerage firm situated in Madison, the capital of Wisconsin, has had to pay 'disgorgement' (repayment of wrongfully-collected reveune) of $157,327, prejudgment interest of $9,152 and a civil penalty of $75,000. It has not, however, admitted or denied the SEC's assertions about misconduct in the relevant cease-and-desist order.

Harbour is responsible for the regulatory compliance and supervision of its representatives, which provide both brokerage and investment advisory services to HNW clients in the main. In an attempt to provide various choices to its clients and representatives, Harbour recommends certain broker-dealers to execute and clear securities transactions and provide custody for their assets. In 2012 and 2013, Harbour recommended four broker-dealers for its fee-based advisory services, including the third-party broker-dealer/custodian, known as Custodian A, and in 2014 added an additional custodian.

A conflict of interest

In 2008, Harbour signed a marketing services agreement with Custodian A, under which the custodian paid Harbour fees (according to AuA in each case) in its capacity as an investment advisor. Harbour’s advisory clients did not pay these fees or any additional charges as a result of the payment. Harbour did not share these payments with its registered representatives, nor did the agreement oblige it to provide any services to Custodian A. The aggreement therefore created an incentive for Harbour to recommend Custodian A over its other custodians - a conflict of interest on which the SEC subsequently siezed. More to the point, Harbour (whose British spelling remains a mystery) did not tell the SEC about the arrangement on a Form ADV until 2016.

Harbour did make reference to the agreement on its website, but this did not fulfill its obligation to disclose it to others because it only said that Harbour “may” receive fees from Custodian A - a far cry from a disclosure about the actual quarterly payments - and the entry did not say that the fees were based on percentages of clients' assets. The firm, moreover, only directed some of its clients to the website, and then not to the actual page with the note on.

Worse execution

Section 206 Advisors Act gives investment advisors a fiduciary duty to act for the benefit of their clients. That duty includes, among other things, an obligation to seek 'best execution' for their transactions – i.e. “to seek the most favourable terms reasonably available under the circumstances.” The SEC has long stated in settled enforcement actions that when an investment advisor causes a client to purchase a more expensive share class when a less expensive class is available, it has failed in its duty to seek 'best execution.' Harbour encouraged its clients to invest in a mutual fund share class that paid a 12b-1 fee (an annual marketing or distribution fee on a mutual fund) to Harbour. Some of these clients were eligible to purchase a share class in the same fund that did not pay 12b-1 fees, which would have lowered their costs. As a result, the SEC says that Harbour flouted its duty to "seek best execution for advisory client transactions."