SEC Charges One Oak Capital and Rep With Breaching Fiduciary Duties
The U.S. Securities and Exchange Commission has charged One Oak Capital Management, a New York-based registered investment adviser, and one of its representatives, Michael DeRosa, with failing to adequately disclose advisory fees to clients who converted their brokerage accounts to advisory accounts.
According to the SEC, from approximately June 2020 through October 2023, One Oak and DeRosa failed to adequately disclose advisory fees to certain clients converting their brokerage accounts at an unaffiliated broker-dealer to advisory accounts at One Oak. DeRosa recommended that his customers, most of whom were older adults and had been long-time clients at the broker-dealer, convert more than 180 brokerage accounts to advisory accounts at One Oak. As a result of these conversions, One Oak and DeRosa charged the converted accounts advisory fees based on a percentage of assets under management, rather than just brokerage commissions, as they were previously charged by the broker-dealer.
Because the converted accounts had relatively little trading activity before and after the conversions, the change in fee structure resulted in significantly increased costs for clients, even though these clients generally received no additional services or benefits. The SEC stated that, therefore, One Oak and DeRosa placed their financial interests ahead of the interests of the prospective clients in recommending the conversions.
In addition, One Oak and DeRosa did not conduct meaningful reviews of the clients’ investment profiles or the characteristics of the two account types. As a result, One Oak and DeRosa did not have a reasonable basis to believe that an advisory account was in their clients’ best interests, either at the time of conversion or thereafter. In fact, the SEC reported, many of the converted accounts were not suitable to be advisory accounts.
As a result, One Oak and DeRosa violated their fiduciary duty under the Investment Advisers Act of 1940 to disclose to their clients all material facts about the advisory relationship, including the fees they charge for their services and any conflicts of interest between themselves and their clients. They also violated Advisers Act Rule 204-3 and One Oak’s own compliance policies, both of which require that clients be provided with a copy of the Form ADV Part 2A, a brochure that describes an investment adviser’s business practices, offerings, and disciplinary procedure, before or at the time of entering into an advisory agreement.
One Oak’s compliance policies require that the firm obtain completed investment management agreements, or IMAs, signed by clients before providing advisory services and charging advisory fees. In violation of One Oak’s policies, DeRosa provided some clients with IMAs that did not attach a completed fee schedule specifying the advisory fee and, for approximately 60 other accounts, failed to provide an IMA at all before providing advisory services and before One Oak began to charge advisory fees to those accounts.
The SEC also said that, in some instances, an assistant under DeRosa’s supervision provided clients with IMAs with blank fee schedules and then filled in the fee schedule with the advisory fee after the clients signed the IMA. These clients were not provided with the completed IMAs or any other disclosures regarding the specific advisory fee they would be charged.
One Oak and DeRosa have agreed to settle the SEC’s charges. As part of the settlement, One Oak will pay a civil penalty of $150,000 and will be required to retain an independent compliance consultant to review and make recommendations regarding the adoption and implementation of One Oak’s policies and procedures. DeRosa will pay a civil money penalty of $75,000 and is suspended for nine months.
The SEC reported that DeRosa had no prior disciplinary history with the commission. One Oak Capital also reportedly had no disciplinary history. The firm had approximately $283 million in assets under management as of April 2024.
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