Lessons from the SEC’s Action Against Hudson Valley Wealth Management

In yet another recent enforcement action, the Securities and Exchange Commission (SEC) announced settled charges against Hudson Valley Wealth Management Inc. and its founder, Christopher Conover, for failing to disclose conflicts of interest and making misleading statements to clients. This case again underscores the critical importance of transparency and fiduciary duty in the investment management industry. Arootah Advisor Michelle McGurk unpacks what this case means for the alternative investment industry.

The Case at a Glance

The SEC’s investigation revealed that between September 2017 and October 2021, Hudson Valley and Conover advised both a private investment fund and individual clients to invest in films produced by a specific film production company. During this period, Conover received approximately $530,000 from the production company through an affiliated entity, which was not initially disclosed to clients. Later, Conover misrepresented the payments as compensation for his role as an executive producer on the films. Additionally, in May 2021, Hudson Valley and Conover honored a redemption request from one fund investor while neglecting similar requests from other clients, thereby breaching their fiduciary duties.

SEC’s Findings and Penalties

The SEC found that Hudson Valley and Conover violated the antifraud provisions of Sections 206(2) and 206(4) of the Investment Advisers Act of 1940, as well as Rule 206(4)-8. To settle the charges, Hudson Valley agreed to pay a $200,000 civil penalty, while Conover agreed to pay more than $600,000 in disgorgement and prejudgment interest and a $150,000 civil penalty. Both parties also agreed to cease-and-desist orders and censures.

Similar Cases

This enforcement action is not an isolated incident as we’ve seen the SEC consistently target investment advisers who fail to disclose conflicts of interest. As highlighted in our January 2024 regulatory roundup, the SEC aggressively pursued enforcement actions against advisers in 2023 for undisclosed conflicts of interest. This included the June 2023 case against Insight Venture Management for miscalculating management fees, and the September 2023 action against Prime Group Holdings for failing to disclose conflicts involving brokerage fees paid to a firm owned by its CEO. Another significant enforcement action pertaining to undisclosed conflicts was the AssetMark case announced in September 2023.

SEC Examination Priorities

The Hudson Valley case aligns with the SEC’s ongoing examination priorities, which emphasize the importance of transparency and conflict disclosure. In its 2024 Examination Priorities report, the SEC highlighted several key areas of focus for investment advisers including those relevant to this case:

• Conflicts of Interest: Ensuring that all potential conflicts are fully disclosed to clients and managed appropriately.
• Fiduciary Duty: Reinforcing the obligation of advisers to act in the best interests of their clients, particularly in relation to fees, expenses, and investment recommendations.
• Disclosure and Transparency: Examining whether advisers provide clear, complete, and timely information about their practices, including any material changes.

4 Key Takeaways for Investment Managers

Here are four key takeaways that investment managers should keep in mind to protect their clients’ interests and uphold the integrity of their operations.

1. Rigorous Conflict Disclosure Procedures

Investment managers must implement robust procedures to identify and disclose any potential conflicts of interest. This involves continuous monitoring and updating disclosures as necessary. Transparency is paramount to maintaining client trust and complying with regulatory requirements.

2. Upholding Fiduciary Duty

Advisers must prioritize their clients’ interests above their own. This means providing unbiased advice and avoiding any actions that could be perceived as self-serving. Fiduciary duty extends to all aspects of client interactions, from investment recommendations to handling redemption requests.

3. Comprehensive Compliance Programs

Developing and maintaining a comprehensive compliance program is essential. This includes regular training for staff, rigorous internal controls, and proactive measures to ensure adherence to all regulatory obligations. Investment managers should also conduct periodic reviews of their compliance policies and procedures to address any potential gaps.

4. Preparing for SEC Examinations

Investment managers should be prepared for SEC examinations by maintaining detailed records and documentation of their practices. This includes evidence of conflict disclosures, compliance with fiduciary duties, and transparency in client communications. Being proactive and cooperative during examinations can help mitigate potential enforcement actions.

The Bottom Line

The SEC’s action against Hudson Valley Wealth Management Inc. and Christopher Conover serves as a critical reminder of the importance of transparency, and fiduciary duty in the investment management industry. By adhering to best practices and maintaining robust compliance programs, investment managers can protect their clients’ interests and uphold the integrity of their operations. As the SEC continues to prioritize these areas in its examinations and enforcement actions, it is more important than ever for investment advisers to stay vigilant and proactive to prevent similar violations. Our team of experts can help ensure you are compliant. Take the first step and find out how Arootah’s Hedge Fund Advisory can support you.