Registered investment adviser Kovack Advisors was ordered to pay $899,513 by the SEC for failing to review the suitability of wrap account programs for its clients.
The monetary penalty and other penalties were agreed to by Fort Lauderdale, Florida-based Kovack Advisors as part of a settlement with the agency, according to the SEC. The company will pay $166,239 in restitution, $33,274 in prejudgment interest and $700,000 in civil penalties, the agency said.
“We acted quickly to correct this error on the part of our company, while implementing improved processes and protocols to prevent this from happening again,” a company spokesperson said in an email. mail. “We have reached a final conclusion on this matter, so that all parties can move forward.
According to the SEC, Kovack Advisors has been a registered investment adviser since 2004 and serves more than 15,000 retail, high net worth and institutional clients in discretionary and non-discretionary accounts. The company’s latest Form ADV showed it had assets under management of around $4.5 billion.
Kovack Advisors offered its advisory services through wrap accounts from at least 2015 through August 2018, the SEC said. Company brochures and some client account agreements claimed that Kovack Advisors would review accounts regularly — sometimes as often as semi-annually — to ensure the account type remained appropriate, the agency said.
“While providing benefits to some customers, wrapper fee programs are not in the best interests of all customers,” the SEC order said. “Advisory clients with infrequent trading activity, for example, may pay higher fees on an aggregate account than they would if they kept their assets in a non-integrated account or a brokerage account where the client would otherwise pay the trading fees incurred, but a lower advisory fee in a non-integrated account, or no advisory fee in a brokerage account. »
In August 2018, the company stopped offering wrap accounts and updated its disclosures, the SEC said.
From 2015 to when Kovack Advisors terminated the program, the company did not perform these reviews in a timely manner and in fact did not perform any reviews at all from 2012 to 2015, the SEC said. Because of that failure, the SEC said, clients wrapped up with little or no transactions on their accounts ended up paying unnecessary management fees. And in other cases, packaging customers were charged transaction fees on top of packaging fees, the agency said.
A review in 2017 revealed the lack of account reviews, the SEC said, but even then Kovack Advisors failed to adopt and implement written policies and procedures that would prevent future violations.
Following the SEC’s investigation into its non-compliance, the company hired an outside attorney to help draft enhanced disclosures and a securities compliance consultant to help revise the company’s written policies and procedures. Kovack Advisors, the SEC said. The corrective measures took into account the financial penalty, the agency said.