SEC Unforgiving of Dual Registrant’s Undisclosed Program to Help Transition New Reps

17 June 2021 Publication
Authors: Stuart E. Fross

When representatives change firms, they often receive forgivable loans from the new firm to offset lost compensation during transition of their practices. These transition loans typically are linked to working for the new firm for a period of time and/or hitting production levels.  A recent enforcement action under the Advisers Act against a dual registrant makes plain that potential conflicts of interest associated with representatives becoming tied to the new firm and its products or services (at the peril of having to repay the loan) must be disclosed (not just by the broker) but by the adviser in its Form ADV.  The SEC alleges that loan repayment risk creates a heightened conflict of interest and puts a special premium on the representative selling products that aid the representative in meeting their loan obligations that is more acute than would be the case in relation to receipt of commissions or bonuses in relation to the sale of those same products or services.   

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