Converting Accounts to Advisory Accounts Might Violate the IAA

Mark Astarita – Moving clients from a fee based account to an advisory account can cause some problems if not handled properly. This case underscores the fact that regulatory authorities continue emphasizing the importance of transparency, proper disclosures, and prioritizing clients’ best interests in financial advisory services. Investment professionals must uphold their fiduciary responsibilities to maintain investor trust and market integrity.

As financial regulations tighten, investment advisers should ensure compliance with fiduciary standards, avoiding practices that could lead to conflicts of interest or financial harm to clients. Firms must implement robust compliance programs to prevent violations and maintain ethical investment practices.

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 The SEC announced settled charges against One Oak Capital Management LLC, a registered investment adviser based in New York, and Michael DeRosa, a former investment adviser representative at the firm. The charges stem from misconduct related to advisory services provided to retail clients.

Failure to Disclose Fee Increases and Conflicts of Interest

According to the SEC’s order, between June 2020 and October 2023, One Oak and DeRosa recommended that clients at an unaffiliated broker-dealer—where DeRosa was also employed—convert over 180 brokerage accounts to advisory accounts at One Oak. Many of these clients were elderly, had long-standing relationships with DeRosa, and had previously paid commissions under the broker-dealer’s fee structure.

One Oak and DeRosa failed to disclose critical information about these conversions. Specifically, the switch to advisory accounts led to substantially higher fees for clients while significantly increasing DeRosa’s compensation. The SEC found that neither One Oak nor DeRosa properly informed clients about the financial implications or the inherent conflict of interest involved in these account conversions.

Increased Costs Without Additional Benefits

The SEC’s investigation revealed that the fee structure changes imposed by One Oak and DeRosa resulted in significantly higher costs for clients without providing additional services or advantages. The order determined that One Oak and DeRosa did not adequately assess whether moving clients from brokerage accounts to advisory accounts aligned with their best interests. In many cases, these advisory accounts were deemed unsuitable for the affected clients.

Tejal D. Shah, Associate Regional Director of the SEC’s New York Regional Office, stated, “We remain committed to holding investment advisers accountable when they breach their fiduciary duties at the expense of retail clients. One Oak and DeRosa prioritized their financial gains over the best interests of their clients by converting brokerage accounts solely for higher fees.”

Violations of the Investment Advisers Act of 1940

The SEC’s order concluded that One Oak and DeRosa willfully violated the antifraud provisions outlined in Section 206(2) of the Investment Advisers Act of 1940. Additionally, One Oak was found in violation of compliance rule provisions under the Advisers Act.

To resolve the charges, One Oak agreed to pay a civil penalty of $150,000 and retain an independent compliance consultant to review its policies and procedures related to its retail investment business. Meanwhile, DeRosa consented to a civil penalty of $75,000 and accepted a nine-month suspension from the securities industry. Both parties settled the charges without admitting or denying the SEC’s findings.

SEC Press Release

Representing Advisors and Investors, Nationwide.

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