SEC Charges California Advisory Firm AssetMark for Failing to Disclose Multiple Financial Conflicts

The Securities and Exchange Commission (SEC) has made an official announcement regarding the settlement of charges against registered investment adviser AssetMark Inc., based in Concord, California. AssetMark has agreed to pay an amount exceeding $18 million to resolve allegations pertaining to undisclosed conflicts of interest related to a cash sweep program operated by its affiliated custodian and its receipt of substantial revenue sharing payments from third-party custodians.

According to the SEC’s order, spanning from at least September 2016 to January 2021, AssetMark failed to provide comprehensive and transparent disclosure concerning conflicts of interest stemming from its affiliate’s cash sweep program. This program involved the transfer, or “sweep,” of clients’ uninvested cash into interest-bearing bank accounts. AssetMark did not inform its clients that it played a role in determining the fee that its affiliate custodian received for operating the cash sweep program. This fee had the effect of reducing the interest paid to those clients. Furthermore, the order notes that from at least January 2016 through August 2019, AssetMark received custodial support payments from select third-party custodians based on the assets held in specific no-transaction-fee mutual funds. However, AssetMark failed to disclose to its clients that, in certain instances, lower-fee share classes with reduced expense ratios were available to clients. Utilizing these lower-fee share classes would not have resulted in payments to AssetMark.

Andrew Dean, Co-Chief of the SEC Enforcement Division’s Asset Management Unit, underscored the fundamental duty of investment advisers to disclose conflicts between their financial interests and those of their clients. Dean stated, “Investment advisers have a fundamental duty to disclose conflicts between their own financial interests and those of their clients. Here, AssetMark failed to disclose multiple financial conflicts of interest where AssetMark and its affiliated custodian reaped significant financial benefit from decisions it made.”

The SEC’s order concludes that AssetMark violated both antifraud and compliance provisions outlined in the Investment Advisers Act. Without admitting or denying the SEC’s findings, AssetMark has agreed to a cease-and-desist order. This order includes censure, compliance with specific undertakings, and the payment of a civil penalty totaling $9.5 million. Additionally, AssetMark will disgorge over $8.5 million in revenue, along with prejudgment interest, with all these funds being distributed to the investors who were harmed by the undisclosed conflicts of interest.