Articles Posted in #Securities & Exchange Commission

The Securities and Exchange Commission today announced that two BMO advisers have agreed to pay over $37 million to settle charges regarding their failure to tell clients about certain aspects of how the advisers selected investments in their retail investment advisory program, known as the Managed Asset Allocation Program (MAAP), which included the selection of more expensive investments from which BMO advisers profited.

According to the SEC’s order, when selecting investments for clients, BMO Harris Financial Advisors Inc. (BMO Harris) and BMO Asset Management Corp. (BMO Asset Mgmt) preferred mutual funds managed by BMO Asset Mgmt (proprietary funds) and invested approximately 50% of MAAP client assets in proprietary funds. This practice resulted in payment of additional management fees to BMO Asset Mgmt, however, the SEC’s order found that neither BMO adviser disclosed this practice or the associated conflict of interest to clients. Moreover, the SEC’s order found that, when considering mutual funds for MAAP, BMO Asset Mgmt evaluated the lower-cost institutional share class for both proprietary and non-proprietary funds, but the higher-cost, non-institutional share class for proprietary mutual funds always was selected for MAAP.

In addition, the SEC found that BMO Harris failed to disclose its conflicts of interest arising from investing MAAP client assets in higher-cost share classes of certain mutual funds, including funds managed by BMO Asset Mgmt, when lower-cost share classes were available. By selecting the higher-cost share classes, BMO Harris received revenue sharing payments and avoided paying certain transaction costs, while clients received lower returns on these investments.

Accounting firm PricewaterhouseCoopers LLP was charged by the Securities & Exchange Commission with improper professional conduct in connection with 19 engagements on behalf of 15 SEC-registered issuers and violating auditor independence rules in connection with engagements for one issuer where the firm performed prohibited non-audit services. The SEC also charged PwC partner Brandon Sprankle with causing the firm’s independence violations. Both respondents have agreed to settle the charges and PwC will pay over $7.9 million in monetary relief.

The SEC’s order finds that PwC violated the SEC’s auditor independence rules by performing prohibited non-audit services during an audit engagement, including exercising decision-making authority in the design and implementation of software relating to an audit client’s financial reporting, and engaging in management functions. In connection with performing non-audit services for 15 SEC-registered audit clients, the order states that PwC violated Public Company Accounting Oversight Board (PCAOB) Rule 3525, which requires an auditor to describe in writing to the audit committee the scope of work, discuss with the audit committee the potential effects of the work on independence, and document the substance of the independence discussion. According to the order, PwC’s actions deprived numerous issuers’ audit committees of information necessary to assess PwC’s independence. As further detailed in the order, the violations occurred due to breakdowns in PwC’s independence-related quality controls, which resulted in the firm’s failure to properly review and monitor whether non-audit services for audit clients were permissible and approved by clients’ audit committees.

“Auditors play a fundamental role in protecting the reliability and integrity of financial reporting and must ensure that non-audit services do not come at the cost of their independence on audits of public companies,” said Anita B. Bandy, Associate Director of the SEC’s Division of Enforcement. “PwC repeatedly provided non-audit services without having effective quality controls in place for monitoring whether the services impaired its independence on audit engagements and were properly disclosed to audit committees.”

Sandra Kuba, a former accountant at the Walt Disney Company filed a Securities and Exchange Commission whistleblower report which alleges that the company has falsely inflated and overstated its revenue for years.  Ms. Kuba worked at the company for 18 years in their revenue-operations department. She detailed that the parks-and-resorts business overstated their revenue by billions of dollars.  She estimated the company’s 2008-2009 annual revenue could be overstated as much as $6 billion.

Marketwatch reports that their review of her filings shows that employees allegedly boosted revenue by recording fictitious revenue for complimentary golf rounds or for free guest promotions and also recording revenue for $500 gift cards at their face value even when guests paid a discounted rate of $395. Kuba also says that employees sometimes recorded revenue twice for gift cards, both when guests bought the gift card and when it was used at a resort. Sometimes, revenue was recorded even though a gift card was given to a guest for free following a customer complaint, for instance, according to the whistleblower’s allegations.

Kuba told MarketWatch she first reported the alleged revenue-recognition issues to management in 2013. She said that no one responded to her at that time. She said that she escalated her concerns to a more senior executive in 2016 and that Disney’s corporate audit group contacted her once in November 2016 but never followed up.