SEC Charges Registered Investment Adviser Zoe Financial for Failure to Disclose Conflict of Interest

The Securities and Exchange Commission (SEC) has recently announced charges against Zoe Financial Inc., a New York-based investment adviser. The SEC alleges that Zoe Financial failed to adequately disclose conflicts of interest to its clients and prospective clients. The commission found that Zoe Financial operated a referral service that used an algorithm to match third-party investment advisers within its network with individuals seeking recommendations.

Salespeople for Zoe Financial often followed up with individuals who did not choose a recommendation generated by the algorithm, suggesting additional advisers beyond the algorithm's initial recommendations. In January 2023, Zoe Financial introduced Zoe Wealth, a service providing sub-advisory services, account onboarding assistance, and back-office support for its network of investment advisers.

The order reveals that Zoe Financial had a financial incentive for advisers in its network to utilize Zoe Wealth, thus creating a conflict of interest. Furthermore, while the algorithm did not take into account whether an adviser employed Zoe Wealth, salespeople frequently became involved in the referral process, suggesting advisers not initially recommended by the algorithm.

The SEC discovered that Zoe Financial did not adequately disclose this conflict in its Form ADV Brochure until December 2024. Despite disclosing that certain advisers had indirect minority interests in Zoe Financial, the company did not accurately describe how it attempted to mitigate this conflict. According to Sheldon Pollock, Associate Director of the SEC's New York Regional Office, investment advisers are required to fully and fairly disclose material conflicts of interest.

The SEC concluded that Zoe Financial willfully violated Section 206(2) of the Investment Advisers Act of 1940. As a result, Zoe Financial agreed to a cease-and-desist order, a censure, and a civil monetary penalty of $450,000. The order acknowledges some remedial actions taken by Zoe Financial, such as revising their compliance manual and hiring an in-house chief compliance officer.