New York-based Kahn Brothers Advisors (KIA), and its principal owner and president, Thomas Kahn, have agreed to pay more than $1 million to settle SEC charges that the firm made misstatements and omissions regarding brokerage services provided by its affiliated broker-dealer, Kahn Brothers LLC (KBD), according to the agency.
KIA and Kahn failed to fully disclose to advisory clients the conflict represented by the relationship with KBD and made misleading statements that KIA would aggregate clients transactions to reduce commissions, the SEC said.
In addition, KIA and Kahn did not seek best execution for KIA clients, failed to conduct a best execution review of KBD and failed to adopt and implement written policies and procedures that would have prevention violations of the Advisors Act, according to the SEC.
KIA did not return a call by press time.
As a result of its investigation, the SEC ordered Kahn and KIA to pay $701,799 in disgorgement, $146,100 in prejudgment interest, and $250,000 in a civil penalty.
As of March 31, KIA had about $690 million in assets under management among 404 clients, the firm’s latest Form ADV showed. In general, KBD exists to service KIA clients, the SEC said.
KIA’s typical client had less than $1 million in invested assets, and KIA employed a long-term, buy-and-hold value investing strategy, the SEC said, adding that KIA accounts tended to buy and sell the same securities at the same time, although infrequently. For this, KIA charged an advisory fee of 1% of AUM, but some clients paid less or only paid a fee on invested AUM, the SEC said.
When it came to the trades, however, KBD charged most advisory clients a rate characterized by KIA as “regular” or “prevailing” when in fact it was based on the rate broker-dealers charged prior to May 1975, and could be as high as $0.80 or $0.90 per share, the SEC said, although a very small number of clients traded at $0.05 or $0.10 per share.
“Disclosures that commission rates charged by KBD ‘may’ not be the ‘lowest,’ the ‘absolute lowest,’ or even ‘not the lowest’ failed to fully and fairly disclose all material facts concerning the conflicts that arose from KIA’s use of an affiliated broker-dealer to execute advisory client transaction,” the SEC said.
“These disclosures fail to inform clients that the fees charged to clients on the Pre-1975 schedule are in fact much higher than other broker-dealers charges for similar services, and omit to tell clients that lower commission arrangements were freely available at other broker-dealers, or that KBD charged some clients a much lower flat fee of $0.05 or $0.10 per share,” the SEC continued. “The disclosure also did not disclose to clients the conflict that, by recommending that clients use KBD and pay commissions based on the Pre-1975 schedule, Kahn would receive greater compensation than he would if the clients paid commissions to KBD based on a flat per share based commission rate of $.05 or $.10 per share.”
In addition, the SEC said it found that KIA did not aggregate client transactions, which would have resulted in much lower fees.
Along with the monetary resolution, the SEC ordered KIA to notify all advisory clients of the filing, revise all relevant disclosure documents, review KBD’s commission rates against other broker-dealers, and determine whether existing clients should continue to use KBD or move to a less expensive broker-dealer.