[ by Howard Haykin]

The SEC instituted a settled administrative proceeding against 2 Portland, OR-based RIAs - registered investment advisory firms - and their owner in a matter involving undisclosed revenue-sharing agreements and multiple potential conflicts of interest.

Respondents in this Case. Focus Point Solutions is an RIA that is owned and operated by Respondent Christopher Hicks.  The firm provides investment advice and back-office custodial support to both related and unrelated investment advisory firms.  As of December 2011, Focus Point served as a non-discretionary investment adviser with some $1.7 billion in assets under management ("AUM").  Focus Point also serves as the sub-adviser to the $65 million Generations Multi-Strategy Fund, a series of the Northern Lights Fund Trust. 

The H Group is an RIA that shares common ownership with Focus Point - its president and owner is Christopher Hicks.  The H Group offers investment advisory services to retail clients and, as of December 2011, the firm was managing $515 million.  The H Group receives investment advice and back-office custodial support from Focus Point.

Christopher Keil Hicks, age 44, resides in Portland, OR.  Since January 2008, he has served as President and owner of Focus Point and The H Group. 

SEC Findings and Allegations. SEC investigators found alleged violations in 3 areas of the advisory business. 

• Alleged Violation #1.  First, and most notably, Focus Point received undisclosed compensation through a revenue-sharing agreement with a registered broker-dealer.  The Broker agreed to pay Focus Point for all client assets that Focus Point invested in certain mutual funds. In exchange, Focus Point agreed to provide certain custodial support services to the Broker.

The agreement created incentives for Focus Point to favor a particular category of mutual funds over other investments. Further, Focus Point allegedly did not disclose this conflict of interest to its clients. Failure to disclose such conflicts an RIA would violate Sections 206(2) and 207 of the Advisers Act.  In turn, the RIA's owner - in this case Hicks - would have aided and abetted the RIA in committing such violations.

• Alleged Violation #2. Second, misleading information about Focus Point’s fee structure was provided to the trustees of a mutual fund for which Focus Point was seeking approval to become the sub-adviser. During the process of being hired as a sub-adviser to the fund, Focus Point allegedly told the trustees that Focus Point would not receive any compensation beyond its sub-advisory fee.

However, unbeknownst to the trustees, Focus Point had an arrangement with the fund’s primary adviser that the primary adviser would compensate Focus Point.  Such an omission would prevent the trustees from evaluating all information reasonably necessary to approve the sub-advisory agreement - information that Focus Point was obligated to provide.  Failure to provide such information would violate Section 15(c) of the Investment Company Act.  And again, the owner, such as Hicks, would have aided and abetted that violation.

• Alleged Violation #3. Finally, The H Group, which was related to Focus Point, allegedly voted client proxies in favor of the proposal to approve Focus Point as the fund’s sub-adviser, despite the fact that it had a financial interest in the outcome of the vote. Such a conflict of interest would create an incentive for a firm, such as The H Group, to vote in the best interests of itself and its related adviser, rather than in the best interest of The H Group’s clients.  Voting proxies while having such a conflict of interest would violate Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-6 thereunder.

Settlement Terms. Without admitting or denying the SEC’s charges, Hicks, Focus Point, and The H Group agreed to pay a combined $1.1 million to settle the case - which includes $900K in disgorgement of ill-gotten gains, a $100K penalty to Focus Point, and $50K penalties to both Hicks and The H Group.

SEC Staff Credits. Investigation by Robert Leach and Sahil Desai, members of the Asset Management Unit in the SF Regional Office.   The Asset Management Unit and the SEC’s San Francisco Regional Office have commenced an initiative to shed more light on revenue-sharing arrangements between investment advisers and brokers.

For further details, go to:  [SEC PR 12-180, 9/6/12] and [SEC Order].