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Regulatory Sanctions

Advisor to Pay $505K for Overcharging Clients (But Where’s the Whistleblower?)

May 31, 2019

by Howard Haykin


From the headlines we learn that the SEC fined a North Carolina registered investment advisor $505,000 for overbilling its clients. To be more specific, Stephen Anderson – the sole owner, operator and Chief Compliance Officer of now-defunct River Source Wealth Management - agreed to pay $405,000 in disgorgement and prejudgment interest, along with a $100,000 fine to settle SEC charges that he:
(i)   overcharged River Source clients on their advisory fees by at least $367,000;
(ii)  made material misstatements in the RIA’s Form ADV;
(iii) failed to keep books and records; and,
(iv) failed to adopt and implement compliance policies.
What’s missing from this story, however, is a WHISTLEBLOWER.



WHAT WENT WRONG.    River Source’s primary source of revenue was advisory fees charged to clients, that were supposed to be based on a percentage of each client’s assets under management (“AUM”). Most of those clients had less than $1 million invested with River Source, meaning that they were subject to the firm’s maximum advisory fee rate of 1.25% or 1.5% in 2015 and 2016, respectively.


However, according to the SEC, Anderson overcharged his clients, in the aggregate, by about 40% more than the agreed-upon maximum customer advisory fee rate. In 2015, at least $186,000 of the firm’s $650,000 in total advisory fees received were overcharges, while in 2016, $181,000 of the firm’s $640,000 in total advisory fees were overcharges.


In addition to his fiscal breaches, Anderson committed fraud and regulatory violations by:

  • Materially overstating River Source’s AUM on Forms ADV for years 2015 and 2016 - by at least $34 million and $61 million, respectively.
  • Failing to disclose 2 lawsuits filed against Anderson and River Source by former River Source clients.
  • Failing to keep accurate and current books and records.
  • Maintaining “off the shelf” compliance policies that were not tailored to the firm’s business.
  • Misleading clients about the reason their assets were transferred from the firm’s long-time asset custodian.



FINANCIALISH TAKE AWAYS.    Yet, it’s perhaps that last violation that concerns me most. As more fully noted in Paragraph 15 of the SEC Order


In 2017, Anderson also misled clients about the reason he transferred their assets from River Source’s long-time asset custodian. Anderson falsely told clients in a February 27, 2017 letter that he had “chosen” to terminate the custodial relationship and that the decision was “amicable.” In fact, the asset custodian made the decision to end its relationship with River Source after it noticed irregular billing practices, requested documents to support certain charges, and failed to receive those documents from Anderson.
[Note: bold emphasis inserted by Financialish]


If, as it appears, the asset custodian attempted to investigate River Source’s “irregular billing practices,” but was stymied but the firm’s refusal to cooperate with a request for documents, why then did the custodian not report any concerns/suspicions/suspicious activities to the SEC?


Was it that the asset custodian was not required by law to report such suspicions, even though it was troubled enough to drop its relationship with its long-time advisory client? If so, that seems to come across as a lame excuse.


Just as there are rules and regulations requiring financial institutions to submit SARs (Suspicious Activity Reports) based only on suspicion – and ultimately, many of these filings do not “bear fruit” - why should there not be similar reporting obligations for such instances as the one that prompted this custodian to terminate its client relationship?


OF COURSE THERE SHOULD. And had such regulations been in place back in 2016, it’s likely that this matter would have been resolved more responsively and more responsibly. Time for the SEC to consider putting more teeth into its arsenal.



[For further details on this case, click on SEC Order.]